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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

2020
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
to

Commission file number:
1-32381

HERBALIFE NUTRITION LTD.

(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)

its charter)

Cayman Islands

98-0377871

Cayman Islands
98-0377871
(State or Other Jurisdictionother jurisdiction of

Incorporation

incorporation or Organization)

organization)

(I.R.S. Employer

Identification No.)

P.O. Box 309GT

Ugland House, South Church Street

Grand Cayman, Cayman Islands

(Zip Code)

KY1-1106

(Address of Principal Executive Offices)

principal executive offices)

(Zip Code)

(213)
745-0500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

each class:

Trading Symbol(s):
Name of Each Exchangeeach exchange on Which Registered

which registered:

Common Shares, par value $0.001$0.0005 per share

HLF
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined
in Rule 405 of the Securities Act.    Yes  
    No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T
 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229,405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in
Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated
filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒
Indicate by check mark whether registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    Yes      No  

There were 87,419,647117,916,776 common
shares outstanding as of February 15, 2018.10, 2021. The aggregate market value of the Registrant’s common shares held by
non-affiliates
was approximately $1,620$
2,795
 million as of June 30, 2017,2020, based upon the last reported sales price on the New York Stock Exchange on that date of $71.33.

$

44.98
. For the purposes of this disclosure only, the registrant has assumed that its directors, executive officers, and the beneficial owners of 5% or more of the registrant’s outstanding common stock are the affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2017,2020, are incorporated by reference in Part III of this Annual Report on
Form 10-K.


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FORWARD-LOOKING STATEMENTS

This documentAnnual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management, including for future operations;operations, capital expenditures, or share repurchases; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; any statements of belief;belief or expectation; and any statements of assumptions underlying any of the foregoing.foregoing or other future events. Forward-looking statements may include, among other, the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “anticipate” or any other similar words.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporatedmany of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by reference in our filings with the Securities and Exchange Commission.
COVID-19
pandemic. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include among others, the following:

the potential impacts of the
COVID-19
pandemic on us; our Members, customers, and supply chain; and the world economy;
our ability to attract and retain Members;
our relationship with, and our ability to influence the actions of, our Members;

our noncompliance with, or improper action by our employees or Members in violation of, applicable law;

U.S. and foreign laws, rules, and regulations;

adverse publicity associated with our productsCompany or network marketing organization,the direct-selling industry, including our ability to comfort the marketplace and regulators regarding our compliance with applicable laws;

changing consumer preferences and demands;

the competitive nature of our business;

business and industry;

legal and regulatory matters, governing our products, including potential governmental or regulatory actions concerning, the safety or efficacy of our products and network marketing program, including the direct selling market in which we operate;

legal challenges to, our products or network marketing program;

program and product liability claims;

the consent orderConsent Order entered into with the FTC, the effects thereof and any failure to comply therewith;

risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, disruptions or conflicts with our third party importers, pricing and currency devaluation risks, especially in countries such as Venezuela;

China;

uncertainties relating to interpretation and enforcement of legislation in China governing direct selling and anti-pyramiding;

our inability to obtain the necessary licenses to expand our direct selling business in China;

adverse changes in the Chinese economy;

our dependence on increased penetration of existing markets;

any material disruption to our business caused by natural disasters, other catastrophic events, acts of war or terrorism, cybersecurity incidents, pandemics and/or cyber-security incidents;

other acts by third parties;

noncompliance by us or our Members with any privacy laws, rules, or regulations or any security breach involving the misappropriation, loss, or other unauthorized use or disclosure of confidential information;
contractual limitations on our ability to expand or change our business;

direct-selling business model;

our reliance on our information technology infrastructure and manufacturing facilities and those of our outside manufacturers;

the sufficiency of our trademarks and other intellectual property rights;

property;

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product concentration;

our reliance upon, or the loss or departure of any member of, our senior management team which could negatively impact our Member relations and operating results;

team;

U.S. and foreign laws and regulations applicable to our international operations;

uncertainties relating to the United Kingdom’s vote to exit from the European Union;

restrictions imposed by covenants in the agreements governing our credit facility;

indebtedness;

risks related to the convertible notes;

risks related to our convertible notes;
changes in, and uncertainties relating to, the application of transfer pricing, customs duties, value added taxes, and other tax regulations, and changes thereto;

changes in tax laws, treaties, orand regulations, or their interpretation;

taxation relating to our Members;

product liability claims;

our incorporation under the laws of the Cayman Islands;

and

whether we will purchase any of our shares in the open markets or otherwise; and

share price volatility related to, among other things, speculative trading and certain traders shorting our common shares.

Additional factors and uncertainties that could cause actual results to differ materially from our forward-looking statements are set forth in this Annual Report on
Form 10-K,
including under the heading “Risk Factors,” “Management’sheadings
“Risk Factors”
and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and in our Consolidated Financial Statements and the related Notes.

Forward-looking statements in this Annual Report on
Form 10-K
speak only as of the date hereof, and forward-looking statements in documents attached that are incorporated by reference speak only as of the date of those documents.hereof. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

The Company

“We,” “our,” “us,” “Company”“Company,” “Herbalife,” and “Herbalife”“Herbalife Nutrition” refer to Herbalife Nutrition Ltd., a Cayman Islands exempted company incorporated with limited liability, and its subsidiaries. Herbalife Nutrition Ltd. is a holding company, with substantially all of its assets consisting of the capital stock of its direct and indirectly-owned subsidiaries.


4

Table of Contents
PART I

Item 1.

BUSINESS

Business

GENERAL

We

Founded in 1980, we are a premier global nutrition company founded in 1980,that provides consumers with a purpose to make the world healthier and happier by developing and selling nutrition solutions for consumers looking to achieve results in the areas of weight management, sports nutrition, and general wellness,health and wellness. We use a direct-selling business model to distribute and market our nutrition products to and through a network of independent members, or Members. We believe that direct selling is ideally suited for our business because the distribution and sales of nutrition products are reinforced by the personal support, coaching, education, and understanding community of like-minded people that our entrepreneurial Members have to enhance theiroffer.
We sell high-quality, science-backed products in the categories of weight management; targeted nutrition; energy, sports, and fitness performance. Asfitness; outer nutrition; and literature, promotional, and other in 95 markets globally as of December 31, 2017,2020. In addition to the effectiveness of personalized selling through a direct-selling business model, we soldbelieve the primary drivers for our products in 94 countries. We believesuccess throughout our
41-year
operating history have been enhanced consumer awareness and demand for our products due to global trends such as the global obesity epidemic, increasing healthcare costs,interest in a fit and aging populations, coupled with the effectiveness of personalized selling through a direct sales channel have been the primary reasons for our success throughout our 38-year operating history.

We believe that direct selling is ideally suited to marketing our nutrition products because sales of weight management, targeted nutrition, energy, sports & fitness, and outer nutrition products are strengthened by the personal contact, support, coaching, education,active lifestyle, living healthier, and the understanding communityrise of like-minded people that our entrepreneurialentrepreneurship.

PRODUCT SALES
Our Members offer.

PRODUCT OVERVIEW

For 38 years, our science-baseduse high-quality and science-backed products have helpedto help other Members and their customers from around the world lose weight, maintainmanage their weight, improve their overall health, enhance their fitness and sport goals, and experience life-changing results. As of December 31, 2017, for the product categories weight management, targeted nutrition, energy, sports & fitness, and outer nutrition,2020 we marketed and sold approximately 120 products encompassing over 4,700 SKUs globally.product types. Our products are often sold as part of a program and therefore our portfolio is comprised of a series of related products designed to simplify weight management and nutrition for our Members and their customers. We categorize our products into five groups: weight management, targeted nutrition, energy, sports & fitness, outer nutrition, and literature, promotional and other. For 2017, 2016, and 2015, ourOur Formula 1 Healthy Meal,Nutritional Shake Mix, our best-selling product line, approximated 30%28% of our net sales.

sales for the year ended December 31, 2020.

The following table summarizes our products by product category.

 

 

Percent of Net Sales

 

 

 

 

 

Product Category

 

2017

 

 

2016

 

 

2015

 

 

Description

 

Representative Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weight Management

 

64.2%

 

 

63.8%

 

 

64.1%

 

 

Meal replacement, protein shakes, drink mixes, weight loss enhancers and healthy snacks

 

Formula 1 Healthy Meal, Herbal Tea Concentrate, Protein Drink Mix, Personalized Protein Powder, Total Control®, Formula 2 Multivitamin Complex, ProlessaDuo, and Protein Bars

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Targeted Nutrition

 

24.5%

 

 

23.6%

 

 

22.7%

 

 

Dietary and nutritional supplements containing quality herbs, vitamins, minerals and other natural ingredients

 

Herbal Aloe Concentrate, Active Fiber Complex, Niteworks®, and Herbalifeline®

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy, Sports & Fitness

 

6.0%

 

 

6.1%

 

 

5.6%

 

 

Products that support a healthy active lifestyle

 

Herbalife24® product line, N-R-G Tea, and Liftoff® energy drink

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outer Nutrition

 

2.1%

 

 

2.4%

 

 

3.0%

 

 

Facial skin care, body care, and hair care

 

Herbalife SKIN line and Herbal Aloe Bath and Body Care line

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Literature, Promotional

    and Other

 

3.2%

 

 

4.1%

 

 

4.6%

 

 

Start-up kits, sales tools, and educational materials

 

Herbalife Member Packs and BizWorks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

category:

  
Percentage of Net Sales
     
  
2020
  
2019
  
2018
  
Description
 
Representative Products
Weight Management
  59.8  61.8  63.5 Meal replacement, protein shakes, drink mixes, weight loss enhancers and healthy snacks Formula 1 Healthy Meal, Herbal Tea Concentrate, Protein Drink Mix, Personalized Protein Powder,
Total Control
®
, Formula 2 Multivitamin Complex,
Prolessa
Duo
, and Protein Bars
Targeted Nutrition
  27.6  26.2  25.4 Functional beverages and dietary and nutritional supplements containing quality herbs, vitamins, minerals and other natural ingredients Herbal Aloe Concentrate, Active Fiber Complex,
Niteworks
®
, and
Herbalifeline
®
Energy, Sports, and Fitness
  7.9  7.2  6.3 Products that support a healthy active lifestyle 
Herbalife24
®
product line,
N-R-G
Tea, and
Liftoff
®
energy drink
Outer Nutrition
  2.0  2.0  1.9 Facial skin care, body care, and hair care 
Herbalife SKIN
line and
Herbal Aloe Bath and Body Care
line
Literature, Promotional, and Other
  2.7  2.8  2.9 
Start-up
kits, sales tools, and educational materials
 
Herbalife Member Packs and Biz
Works
5

Table of ContentsPRODUCT DEVELOPMENT & INTELLECTUAL PROPERTY

We

Product returns and buyback policies
In substantially all markets, our products include a customer satisfaction guarantee. Under this guarantee, any customer or preferred member who is not satisfied with an Herbalife product for any reason may return it or any unused portion of it within 30 days from the time of receipt for a full refund or credit toward the exchange of another Herbalife product. In addition, in substantially all jurisdictions, we maintain a buyback program pursuant to which we will repurchase products sold to a Member who has decided to leave the business. The buyback program has certain terms and conditions that may vary by market, but it generally permits the return of unopened and marketable condition products or sales materials purchased within the prior twelve month period in exchange for a refund of the net price paid for the product and, in most markets, the cost of returning the products and materials to us. Together, product returns and buybacks were approximately 0.1% of net sales for each of the years ended December 31, 2020, 2019, and 2018.
Product development
To help our consumers achieve a healthy active lifestyle, we are committed to providing the highest-quality, science-basedscience-backed products to help our consumers achieve what we refer to as a “healthy, active lifestyle” in the areas of weight management; targeted nutrition (including everyday wellness and healthy aging); energy, sports, &and fitness; and outer nutrition. We relybelieve our focus on nutrition and botanical science and the combination of our internal efforts with the scientific contributions from membersexpertise of outside resources, including our ingredient suppliers, major universities, and our Nutrition Advisory Board, alonghave resulted in product differentiation that has given our Members and consumers increased confidence in our products.
We continue to invest in scientific and technical functions, including research and development associated with creating new or enhancing current product formulations and the advancement of personalized nutrition solutions; clinical studies of existing products or products in development; technical operations to improve current product formulations; quality assurance and quality control to establish the appropriate quality systems, controls, and standards; and rigorous ingredient and product testing to ensure compliance with regulatory requirements, as well as in the areas of regulatory and scientific affairs. Our personalized nutrition solutions include tools which aid in the development of optimal product packages specific to our in-house scientific team,customers’ individual nutritional needs, based on their expected wellness goals.
Our product development strategy is twofold: (1) to continually upgradeincrease the value of existing customers by investing in products to fill perceived gaps in our portfolios, adding flavors, increasing convenience by investing in snacks and bars, and expanding afternoon and evening consumption with products like savory shakes or introducesoups; and (2) to attract new customers by entering into new categories, offering more choices, increasing individualization, and expanding our current sports line. We have a keen focus on product innovation and aim to launch new products as new scientific studies become available and accepted by regulatory authorities around the world. We also utilize the expertise of several international universities and key ingredient suppliers to review, evaluate and formulate new product ideas.variations on existing products on a regular basis. Once a particular market opportunity has been identified, our scientists, along with our operations, marketing, and sales teams, work closely with Member leadership to successfully introduce the product. We aim to have at least one major product launch each year in our key regionsnew products and variations on existing products.
Our Nutrition Advisory Board and Dieticians Advisory Board are comprised of leading experts around the world usually timed aroundin the fields of nutrition and health who educate our major regional Member education and training events. These launches generally target specific product categories and markets we deem strategic to grow our business.

Marketing foodsMembers on the basisprinciples of sound science means using ingredients that have been well studiednutrition, physical activity, diet, and discussed in backgroundhealthy lifestyle. We rely on the scientific literature. Use of these ingredients for their well-established purposes is by definition not novel, and for that reason, most food uses of these ingredients are not subject to patent protection. Notwithstanding the absence of patent protection, we do own proprietary formulations for substantially allcontributions from members of our weight managementNutrition Advisory Board and our

in-house
scientific team to continually upgrade existing products or introduce new products as new scientific studies become available and dietary and nutritional supplements. We take care in protecting the intellectual property rights of our proprietary formulasare accepted by restricting access to our formulas within the Company to those persons or departments that require access to them to perform their functions, and by requiring our finished goods-suppliers and consultants to execute supply and non-disclosure agreements that contractually protect our intellectual property rights. Disclosure of these formulas, in redacted form, is also necessary to obtain sanitary registrations in many countries. We also make efforts to protect some unique formulations under patent law. We strive to protect all new product developments as the confidential trade secrets of the Company and its inventor employees.

We use the umbrella trademarks Herbalife® and the Tri-Leaf design worldwide, and protect several other trademarks and trade names related to our products and operations, such as Niteworks® and Liftoff®. Our trademark registrations are issued through the United States Patent and Trademark Office, or USPTO, and comparable agencies in the foreign countries. As of December 31, 2017, we had over 1,900 trademark registrations worldwide. We consider our trademarks and trade names to be an important factor in our business.

GEOGRAPHIC PRESENCE

As of December 31, 2017, we conducted business in 94 countries throughout the world. The top ten countries worldwide represented approximately 71.8%, 72.9%, and 74.3% of our net sales in 2017, 2016, and 2015, respectively. In the countries where we conduct business, we typically maintain a physical presence and provide sales, marketing, call center, logistics and distribution services. Globally our products can be accessed at over 1,600 locations. We distribute our products through our distribution and sales centers and certain retail partners.

Our operating segments are based on geographical operations in six regions: North America, Mexico, South & Central America, EMEA (Europe, Middle East and Africa), Asia Pacific and China. The following table shows net sales by geographic region.

 

 

Net Sales

 

 

 

 

 

 

Number of

 

 

 

Year Ended December 31,

 

 

Percent of

 

 

Countries

 

Geographic Region

 

2017

 

 

2016

 

 

2015

 

 

Total Net Sales

2017

 

 

December 31,

2017

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

North America

 

$

840.2

 

 

$

955.7

 

 

$

879.5

 

 

 

19.0

%

 

 

5

 

Mexico

 

 

442.7

 

 

 

446.6

 

 

 

479.9

 

 

 

10.0

%

 

 

1

 

South & Central America

 

 

474.3

 

 

 

488.7

 

 

 

569.7

 

 

 

10.7

%

 

 

17

 

EMEA

 

 

868.7

 

 

 

815.6

 

 

 

755.1

 

 

 

19.6

%

 

 

55

 

Asia Pacific

 

 

915.9

 

 

 

913.0

 

 

 

938.6

 

 

 

20.7

%

 

 

15

 

China

 

 

885.9

 

 

 

868.8

 

 

 

846.2

 

 

 

20.0

%

 

 

1

 

Worldwide

 

$

4,427.7

 

 

$

4,488.4

 

 

$

4,469.0

 

 

 

100.0

%

 

 

94

 

For financial data by segment see Note 10, Segment Information, to the Consolidated Financial Statements.


MANUFACTURING, WAREHOUSING AND DISTRIBUTION

Our objective is to provide the highest quality products to our Members and their customers. We seek to accomplish this goal through execution of our “seed to feed” strategy that includes significant investments in quality assurance, scientific personnel, product testing, and increasing the amount of self-manufacturing of our top products. Our seed to feed strategy is rooted in using quality ingredients from traceable sources coupled with the vertical manufacturing of our most popular products. For our botanical products, our seed to feed strategy also includes self-manufacturing some of our teas and herbal ingredients. Our procurement activities for many botanicals now stretch back to the farms and include the complete self-processing of teas and botanicals into finished raw materials.

The foundation for high quality products is the quality of the ingredients. Ingredients are sourced from companies that are large and reputable suppliers in their respective field. For example, soy, our number one ingredient, is sourced from DuPont and ADM. Our vitamins, minerals and other key ingredients come from companies such as DSM (formerly Roche Vitamins) and BASF. Other key suppliers include Tate & Lyle, Kyowa Hakko, and Naturex. In addition to our own modern quality processes, sourcing from these suppliers also provides integrity to our ingredients by utilizing similar quality processes, equipment, expertise and traceability provided by these leading ingredients companies.

The next key component of our seed to feed strategy involves the high quality manufacturing of these ingredients into finished products, including vertical manufacturing. In addition to self-manufacturing, we purchase products from third-party manufacturers which account for a significant amount of our product purchases. During 2017, we purchased approximately 24% of our products from our top three third-party manufacturers. We work closely with our third-party manufacturers to ensure high quality products are produced and tested through a vigorous quality control process. Our current strategy is to continue expanding our self-manufacturing. We accelerated this initiative with the 2009 acquisition of Micelle Labs in Lake Forest, California and the renovation of the facility into a high-output, high-quality powder and liquid manufacturer. We call this facility the Herbalife Innovation and Manufacturing Facility (or “HIM”) Lake Forest. To further strengthen our seed to feed philosophy, we opened an herbal powder and extraction facility in June 2012 located in Changsha, China. The Changsha facility provides high quality tea and herbal raw materials to both our HIM plants as well as our contract manufacturersregulatory authorities around the world. Also, we began production in May 2014 at the HIM Winston-Salem facility, which is our largest manufacturing facility at 800,000 square feet. This facility produces powders, liquids and teas and also has significant expansion opportunities. We have taken similar steps to support our China market, with our HIM Suzhou facility which began operation in 1999. In 2016 we completed renovations and equipment installations, and began operations in our HIM Nanjing, China facility. This has more than doubled our available finished product manufacturing capacity for the China market, and includes significant space for future expansion. Together, these facilities produce approximately 60% to 65% of our inner nutrition products sold worldwide. In our U.S. Company-owned facilities, which produce for the U.S. and most of our international markets, we operate and test to the U.S. Food and Drug Administration, or FDA’s strict acidified food and dietary supplement current Good Manufacturing Practices (cGMPs), even though many of the products being manufactured are classified as food products that are generally subject to less stringent manufacturing standards. For those products not manufactured at HIM facilities, we combine four elements to ensure quality products: the same selectivity and assurance in ingredients as noted above; use of reputable, cGMP-compliant, quality-minded manufacturing partners; a significant supplier qualification and annual audit program; and significant product quality testing.

In addition to ensuring high quality ingredients and building the quality into our finished products, we test our incoming raw materials for compliance to potency, identity and adherence to strict specifications. We also analyze our finished products for label claim and microbiological purity thereby verifying product safety and shelf life. For our self-manufactured products, we do substantially all of our testing in-house at our modern quality control laboratories in the U.S. and China. We have major quality control labs in Southern California, Winston-Salem, North Carolina, Suzhou, China and our Worldwide Quality Center of Excellence in Changsha, China which tests products made at non-HIM facilities, even though they are already tested at audited contract manufacturer labs or third party labs. All HIM quality control labs contain modern analytical equipment and are backed by the expertise in testing and methods development of our scientists. We employ over 500 professionals performing science or technical related functions, which includes product development, quality control, and scientific and regulatory affairs around the world.


MARKETS

The final part of our seed to feed strategy is delivering the high-quality product to our Members and their customers. As the shift in consumption patterns continues to reflect an increasing daily consumption focus, our strategy is to provide more product access points closer to our Members and their customers. We operate distribution points ranging from “hub” distribution centers, or DCs, in Los Angeles, Memphis, and Venray, Netherlands, to mid-size distribution centers in major countries, to small pickup locations spread throughout the world. In addition to these Company-run distribution points, we partner with retail locations to provide Member pickup points in areas which are not well serviced from Company-run distribution points. In aggregate, our Company-run distribution points and partner retail locations represent over 1,600 locations around the world. As many of our products can be temperature sensitive, we monitor our DCs for temperature and humidity and occasionally will use shipping tags which monitor these parameters on certain shipments and provide information to help make adjustments to shipping mode or packaging components to ensure the quality of the product being delivered to an Herbalife Distribution Center.

COMPETITION

Competition
The categories of weight management,management; targeted nutrition,nutrition; energy, sports, & fitness,and fitness; and outer nutrition products are very competitivehighly competitive. We compete against products sold in manya number of distribution channels, including those of direct selling, the internet,online retailers, specialty retailers, and the discounted channels of food, drugsdrug and mass
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merchandise. In particular, our direct-selling competitors include Nu Skin, Tupperware, and USANA and our other competitors include Conagra Brands, Hain Celestial, and Post. We have differentiated ourselves from our peer groupcompetitors through our Members’ focus on the consultative sales process through product education and the frequent contact and support that many Members have with their customers through a community-based approach includingto help customers achieve nutrition goals. Some methods include Nutrition Clubs, Weight Loss Challenges, Wellness Evaluations, and Fit Camps. From a competitive stand point, there
We are many providers in the multi-billion industry of weight management products, including quick-service restaurants and specialty retailers, but we believe that none have effectively combined nutrient dense products along with the personal coaching, community and education as well as product access, provided by our Members through their daily consumption business methods such as Nutrition Clubs, Weight Loss Challenges or Fit Camps.

We arealso subject to competition for the recruitment of Members from other network marketing organizations, including those that market weight management, targeted nutrition, energy, sports & fitness, and outer nutrition products, and other types of products which are sold through direct selling, along with other entrepreneurial opportunities, including those organizations in which former employees or Members of the Company are involved.opportunities. Our ability to remain competitive depends on factors including having relevant products that meet consumer needs, a rewarding compensation plan, enhanced education and tools, innovation in our products and services, and a financially viable company.

For additional information regarding competition, see the risk factors titled “
Our failure to establish and maintain Member and sales leader relationships could negatively impact sales of our products and materially harm our business, financial condition, and operating results
” and “
Our failure to compete successfully could materially harm our business, financial condition, and operating results
” in Part I, Item 1A,
Risk Factors
, of this Annual Report on Form 10-K.
OUR COMPETITIVE STRENGTHS

NETWORK MARKETING PROGRAM

General
Our products are sold and distributed through a global direct selling business model which individuals may join to become a Member of our network marketing program. As a global nutrition company, we believe that the
one-on-one
personalized service inherent in the direct selling channel is the most effective way to sell nutrition products given the need for consumer education about good nutrition and a supportive approach to help consumers seeking to improve their eating habits. We believe that the direct-selling channelbusiness model is ideally suited to marketing and selling our products because salesnutrition products. Sales of weight management, targeted nutrition, energy, sports & fitness, and outer nutrition products are strengthenedreinforced by the ongoing personal contact, coaching, behavior motivation, education, and education betweenthe creation of supportive communities. These are the services that are offered by our Members andto their customers. This frequent, personal contact can enhance consumers’ nutritional and health education as well as motivate healthy behavioral changes in consumers to begin and maintain an active lifestyle through wellness and weight management programs. In addition, our Members consume our products themselves, and, therefore, can provide first-hand testimonials of the use and effectiveness of our products and programs to their customers. This personal productThe personalized experience of our Members has served as a very powerful sales tool for over 38 years.

Our business model enables us to grow our business with moderate investment in our infrastructureproducts.

In certain geographic markets such as the United States, Brazil, India, Russia, and fixed costs. We incur no direct incremental cost to add a new Member in our existing markets, andItaly, we have introduced segmentation of our Member compensation varies directly withbase into two categories: “preferred members” – who are simply consumers who wish to purchase product sales. In addition,for their own household use, and “distributors” – who are Members who also wish to resell products or build a sales organization. One of the key outcomes of this new member segmentation is to provide clear differentiation between those interested in retailing our Members bear the majority of our consumer marketing expenses,products or building a sales organization, and our sales leaders sponsor and coordinate a large share of Member recruiting, meeting and training initiatives. Furthermore, we can readily increase production and distribution ofthose simply consuming our products as a resultdiscount customers. This distinction allows us to both better communicate and market to each group, while also providing us with better information regarding our Members within the context of havingtheir stated intent and goals. As of December 31, 2020, we had approximately 6.2 million Members, including 1.7 million preferred members and 1.5 million distributors in these markets where we have established these two categories and 0.4 million sales representatives and independent service providers in China. Future increases in the number of preferred members, as conversions take place or as we introduce segmentation into other markets, does not in and of itself represent an increase in the total number of Members, nor is it necessarily indicative of our own manufacturing facilities and numerous third party manufacturing relationships, as well as our global footprint of in-house and third party distribution centers.

future expected financial performance.

Our objective is sustainable growth in the sales of our products to our Members and their customers by increasing the retailing productivity, retention and recruitment of our Member base through the following competitive strengths.

Member Base

Our Members are generally those who are eligible to purchase products directly from us.


People become Herbalife Members for a number of reasons. Many first start out as consumersstructure of our products who want to lose weight or improve their nutrition, and are customers of Members. Some later join Herbalife and become Members, which make them eligible to purchase products directly from us, simply to receive a discounted retail price on products they and their families can consume and enjoy.

Some Members join Herbalife to earn part-time or full-time income and are drawn to the entrepreneurial opportunity to earn compensation based on their own skills and hard work. In addition to discounted prices, these Members can earn profit from several sources. First, Members may earn profits by purchasing our products at wholesale prices, discounted depending on the Member’s level within ourNetwork Marketing Plan, and reselling those products at prices they establish for themselves. Second, Members who sponsor other Members and establish, maintain, coach and train their own sales organizations may earn commissions based upon their organization’s sales levels. Members may sponsor other Members in an attempt to build a sales organization, whether or not they have attained any particular level in our Marketing Plan.

Members can achieve the sales leader level based on their purchasing and reselling activity and their organization’s sales production. Sales leaders who have sponsored other Members are also responsible for the development, retention and improved productivity of their sales organizations. However, there are also many Members, which include distributors, who have not sponsored another Member. These “single level” Members are generally considered discount buyers or small retailers. A number of these single-level Members have also attained the sales leader level.

As of December 31, 2017, prior to our February re-qualification process, approximately 625,000 of our Members have attained the level of “sales leader”, of which approximately 536,000 have attained the level of “supervisor” and above in the 93 countries where we use our worldwide Marketing Plan and 89,000 sales officers and independent service providers operating under our China Marketing Plan. Collectively, we refer to this group as “sales leaders.” See Item 7, Management’s Discussion and Analysis of Financial Condition and Operating Results, for a further description of our Sales Leaders and retention rates.

In China, while direct selling is permitted, multi-level marketing is not. As a result, our business model in China differs from that used in other countries. In China, where permitted by law, we sell our products through our Members who are independent contractors. However, Members in China are categorized differently than those in other countries. Chinese citizens who apply and become Members are referred to as “Sales Representatives.” Sales Representatives receive scaled rebates based on the volume of products they purchase. Sales Representatives who reach certain volume thresholds and meet certain performance criteria are eligible to apply to provide marketing, sales and support services. Once their application is accepted, they are referred to as “Service Providers.” Service Providers are independent business entities that are eligible to receive compensation from Herbalife for the marketing, sales and support services they provide so long as they satisfy certain conditions, including procuring the requisite business licenses and having a physical business location. Sales Representatives who are in the process of applying to become Service Providers hold the title of “Sales Officers.”

Geographic Diversification

We have expanded our network marketing organization into 94 countries as of December 31, 2017. While sales within our local markets may fluctuate due to economic, market and regulatory conditions, competitive pressures, political and social instability or for Company-specific reasons, we believe that our geographic diversity mitigates our exposure to any one particular market.

Our Science and our Products

We are committed to providing our Members with high-quality, science-based products to help them increase consumption and retail our products. We believe this can be best accomplished in part by introducing new products and by upgrading, reformulating and repackaging existing product lines. Our internal team of scientists and product developers collaborate with both our Nutrition Advisory Board and key ingredient suppliers to formulate, review and evaluate new product ideas. Once a particular market opportunity has been identified, our scientists along with our operations, marketing and sales teams work closely with our Member leadership to successfully introduce the product into the marketplace.

We believe our focus on nutrition and botanical science and our efforts at combining our internal efforts with the scientific expertise of outside resources that include our ingredient suppliers, major universities, as well as our Nutrition Advisory Board have resulted in product differentiation that has given our Members and consumers increased confidence in our products. We continue to globalize our R&D efforts to better reflect the international nature of the Company by operating R&D centers in Sao Paulo, Brazil, Shanghai, China and Bangalore, India in addition to our main R&D center in Torrance, California.

Program.

We continue to increase our investments in the areas of science and other technical functions including: research and development associated with creating new product formulations, clinical studies of existing products or products in development, technical operations to improve current product formulations, quality assurance and quality control to establish the appropriate quality systems, controls and standards as well as rigorous ingredient and product testing to ensure compliance with regulatory requirements, as well as in the areas of regulatory and scientific affairs. Globally, we spent approximately $74 million in 2017 on these activities, excluding any royalty fees associated with our products, which included approximately $3.0 million of research and development spending as defined by U.S. generally accepted accounting principles.

In 2010, we launched the Herbalife Nutrition Institute. The Institute is an informational resource dedicated to promoting excellence in the field of nutrition. The Institute’s website is our primary communication vehicle, and an educational resource for the general public, government agencies, the scientific community, and our Members, about good nutrition and basic health. Its mission is to encourage and support research and education on the relationship between good health, balanced nutrition and a healthy active lifestyle. In addition to providing research and education on the website and through sponsored conferences and symposia, the Institute has associations with major nutrition science organizations.

Our Nutrition Advisory Board and Dieticians Advisory Board are comprised of leading experts around the world in the fields of nutrition and health who educate our Members on the principles of nutrition, physical activity, diet, and healthy lifestyle.

Members of our Nutrition Advisory Board, Dieticians Advisory Board, and the editorial board of the Herbalife Nutrition Institute are affiliated with Herbalife as individuals and not as representatives of their respective universities or organizations.

OUR STRATEGIES

We work closely with our entrepreneurial Members to improve the sustainability of their businesses and reach consumers in over 90 countries to help make the world healthier and happier. These relationships are key to our continued success as they allow us direct access to the voice of consumers. Our Members eagerly identify and test new marketing efforts and programs developed by other Members and disseminate successful techniques to their sales organizations.

As an example of the effectiveness of managing our Member relationship, around 2004, Members in Mexico developed marketing techniques that improved the productivity and efficiency of our Members as well as the affordability of our weight loss products through the creation of businesses that became known as “Nutrition Clubs”. Rather than buying several retail products, these businesses allow consumers to purchase and consume our products each day (a Member marketing technique we refer to as “daily consumption”), while continuing to benefit from the support and interaction with a Member as well as socializing with other customers in a designated location. Other programs to drive daily consumption, whether for weight management or for improved physical fitness, include Member conducted weight loss contests, or Weight Loss Challenges, and Member led fitness programs, or Fit Camps and Member led Wellness Evaluations. We refer to successful Member marketing techniques that we disseminate throughout our Member network, such as Nutrition Clubs, Weight Loss Challenges and Fit Camps as Distributor Methods of Operations, or DMOs.

Our strategies to grow our business center on our positive and productive relationships with our Members and their relationships with consumers. These strategies include:

Deliver Scientifically Validated Effective Products to Support a Healthy Active Lifestyle

Our product strategy is focused on providing high-quality, science-based products that can support a healthy active lifestyle for Members and their customers in the areas of weight management; targeted nutrition (including everyday wellness and healthy aging); energy, sports & fitness; and outer nutrition. We rely on the scientific contributions from members of our Nutrition Advisory Board, along with our in-house scientific team, to continually upgrade or introduce new products as new scientific studies become available and accepted by regulatory authorities around the world. Additionally, to support our daily consumption initiatives, our product strategy includes projects such as seasonal flavors of our meal replacement shake, new flavors of top selling products and various package sizes and products that can be consumed hot, such as our savory shakes and soups. We have a keen focus on product innovation as we aim to have at least one major product launch in each region each year, timed around our major regional Member education and training events. These launches generally target specific product categories and markets we deem strategic to our business.


Improve the Sustainability of Members’ Businesses

We believe our Members are the most important difference in how we go to market with our nutrition products, because of the one-on-one direct contact they have with their customers, along with the education, training and community support services that we believe help improve the nutrition habits of consumers. Combined with our efforts to improve the effectiveness of our Members’ marketing strategies is our strategy to improve the sustainability of our Members’ businesses in part through the evolution of our Marketing Plan.

We believe a gradual qualification approach is generally important to the success and retention of new sales leaders and benefits the business in the long term as it allows new Members to obtain product and customer experience as well as additional training and education on Herbalife products, daily consumption based DMOs, and the business opportunity prior to becoming a sales leader. In general, to become a sales leader, or qualify for a higher level, Members must achieve specified Volume Point thresholds of product sales or earn certain amounts of royalty overrides during specified time periods and generally must re-qualify once each year.

As a leading direct seller, we also endeavor to foster our Members to fairly and honestly market both our products and the business opportunity as part of being an Herbalife Member.

Improve Members’ Skills through Training

We believe that personal and professional development are key to our Members’ success and therefore we and our sales leaders have meetings and events to support this important objective. We and our Member leadership conduct training sessions on local, regional and global levels attended by thousands of Members to provide updates on product education, sales and marketing training, and instruction on available tools. These events are opportunities to showcase and disseminate our Members’ evolving best marketing practices from around the world such as Nutrition Clubs, Weight Loss Challenges, Fit Camps and other business methods, and to introduce new or upgraded products. A variety of training and development tools are also available through online and mobile platforms.

Increase Brand Awareness

To increase our brand awareness, we and our Members have entered into numerous marketing alliances around the world. Herbalife sponsorships of and partnerships with featured athletes, teams and events promote brand awareness, the use of Herbalife products, and “Better Living Through Nutrition.” We continue to build brand awareness and work towards becoming the most trusted brand in nutrition. We also work to leverage the power of our Member base as a marketing and brand-building tool. We maintain a brand style guide and brand asset library so that our Members have access to the Herbalife brand logo and marketing materials for use in their marketing efforts.

Improve Product Access

As adoption of daily consumption methods continue to expand, we have identified a number of methods and approaches that better support Members by providing access points closer to where they do business and by improving product delivery efficiency through our distribution channels. Specific methods vary by markets, considering local Member needs as well as infrastructure and available resources. We continue to expand the number of Sales Centers, smaller pick up locations (including third party collection points), brand experience centers and automated sales centers. This expansion is based on the needs of our Members and the growth of the business primarily from deeper penetration into existing markets. For example, we now have distribution agreements with multiple retailers. We believe that by leveraging the retailer’s distribution system we are providing our Members with easier product access. We will continue to evaluate the need to increase the number of product access points. Many Members today focus on the use of technology to support their businesses. With the increased activity towards our online and mobile tools, we have enhanced our product access and distribution network to support higher volumes of online or mobile orders which result in Members and their customers selecting home or business delivery options. We continue to see online or mobile ordering activity increase in many established markets.

Leverage Our Infrastructure

We continue to invest in our manufacturing and operational infrastructure to accelerate new products to market and accommodate planned business growth. Additionally, we leverage our technology infrastructure in order to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in technology, evolving industry and regulatory standards, emerging data security risks, and changing user patterns and preferences.


We leverage an Oracle business suite platform, which was upgraded in 2017, to support our business operations, improve productivity and support our strategic initiatives. In addition, we also employ information technology systems to support Members and their increasing demand to be more connected to Herbalife, their business and their consumers. These systems include our Internet-based marketing and Member services platform with tools such as BizWorks, MyHerbalife, GoHerbalife, iChange, and Herbalife Mobile. Additionally, we support a growing suite of point of sales tools to assist our Members with the ordering, tracking and their customer relationship management. We also invest in business intelligence tools to enable better analysis of our business and to identify opportunities for growth. We will continue to build on these platforms so that we can take advantage of the rapid development of technology around the globe to support a more robust Member and customer experience.

OUR NETWORK MARKETING PROGRAM

General

Our products are sold or distributed through a global direct selling business model. Many individuals become part of our direct selling network simply to buy products at a discount directly from us for their own consumption. Others choose to also retail and distribute products that they purchase from us. Finally, some individuals choose to also build a direct sales force and earn compensation (which could include commissions, royalty overrides and production bonuses) based on the activity of their sales organizations, as well as an annual bonus that is based on several additional factors. In China, due to local regulations, we sell our products to and through independent service providers, sales representatives, and sales officers to customers and preferred customers, as well as through Company-operated retail stores when necessary.

On July 18, 2002, we entered into an agreement with our Members that provides that we will continue to distribute Herbalife products exclusively to and through our Members and that, other than changes required by

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applicable law or necessary in our reasonable business judgment to account for specific local market or currency conditions to achieve a reasonable profit on operations, we will not make any material changes to certain aspects of our Marketing Plan that are adverse to our Members without the support of our Member leadership. Specifically, any such changes would require the approval of at least 51% of our Members then at the level of President’s Team earning at the production bonus level of 6% who vote, provided that at least 50% of those Members entitled to vote do in fact vote. We initiate these types of changes based on the assessment of what will be best for us and our Members and then submit such changes for the requisite vote. We believe that this agreement has strengthened our relationship with our existing Members, improved our ability to recruit new Members and generally increased the long-term stability of our business.

Structure

To

Our Members
We believe our Members are the most important differentiator as we go to market with our nutrition products, because of the
one-on-one
direct contact they have with their customers, along with the education, training and community support services that we believe help improve the nutrition habits of consumers. People become Herbalife Members for a number of reasons. Many first start out as consumers of our products who want to lose weight or improve their nutrition, and are customers of our Members. Some later join Herbalife and become Members themselves, which makes them eligible to purchase products directly from us, simply to receive a discounted price on products for them and their families. Some Members are interested in the entrepreneurial opportunity to earn compensation based on their own skills and hard work and join Herbalife to earn part-time or full-time income.
We work closely with our entrepreneurial Members to improve the sustainability of their businesses and to reach consumers As a leading direct seller, we require our Members to fairly and honestly market both our products and the Herbalife business opportunity. Our relationship with our Members is key to our continued success as they allow us direct access to the voice of consumers.
Many of our entrepreneurial Members identify and test new marketing efforts and programs developed by other Members and disseminate successful techniques to their sales organizations. For example, Members in Mexico developed businesses that became known as “Nutrition Clubs,” marketing techniques that improved the productivity and efficiency of our Members as well as the affordability of our weight loss products for their customers. Rather than buying several retail products, these businesses allow consumers to purchase and consume our products each day (a Member in most markets a person must be sponsored by an existing Member and must purchase an Herbalife Member Pack, or HMP (referredmarketing technique we refer to as “daily consumption”), while continuing to benefit from the support and interaction with the Member as well as socializing with other customers in a designated location. Other programs to drive daily consumption, whether for weight management or for improved physical fitness, include Member-conducted weight loss contests, or Weight Loss Challenges,
Member-led
fitness programs, or Fit Camps, and
Member-led
Wellness Evaluations. We refer to successful Member marketing techniques that we disseminate throughout our Member network, such as Nutrition Clubs, Weight Loss Challenges, and Fit Camps, as Daily Methods of Operations, or DMOs.
We believe that personal and professional development is key to our Members’ success and, therefore, we and our sales leader Members have meetings and events to support this important objective. We and our Member leadership conduct
in-person
and virtual training sessions on local, regional, and global levels attended by thousands of Members to provide updates on product education, sales and marketing training, and instruction on available tools. These events are opportunities to showcase and disseminate our Members’ evolving best marketing practices and DMOs from around the world and to introduce new or upgraded products. A variety of training and development tools are also available through online and mobile platforms.
In 2010, we launched the Herbalife Nutrition Institute. The Institute is an International Business Pack, or IBP,informational resource available to Members dedicated to promoting excellence in the United Statesfield of nutrition. The Institute’s website is an important communication vehicle to further our leadership in the field, and Puerto Rico). The HMPan educational resource for the general public, government agencies, the scientific community, and our Members, about good nutrition and basic health. Its
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mission is a Member kit available in local languages which typically includes product samples, a handy tote, booklets describingto encourage and support research and education on the Company, our compensation plan and rules of Member conduct, various training and promotional materials, Member applicationsrelationship between good health, balanced nutrition and a product catalog. The price of an HMP varieshealthy active lifestyle. In addition to providing research and education on the website and through sponsored conferences and symposia, the Institute has associations with major nutrition science organizations.
Member Compensation and Sales Leader Retention and Requalification
In addition to benefiting from discounted prices, Members interested in the entrepreneurial opportunity can earn profit from several sources. First, Members may earn profits by market and provides a low cost entry for incoming Members. HMPs do not generate any Member compensation and are not used for Member qualifications or recognition purposes underpurchasing our products at wholesale prices, discounted depending on the Member’s level within our Marketing Plan.

Volume PointsPlan, and reselling those products at prices they establish for themselves to generate retail profit. Second, Members who sponsor other Members and establish, maintain, coach, and train their own sales organizations may earn commissions on the sales of their organization. Members earning such compensation have generally attained the level of sales leader as described below. There are also many Members, which include distributors, who have not sponsored another Member. Members who have not sponsored another Member are generally considered discount buyers or small retailers and a number of these Members have also attained the sales leader level.

We assign point values, assignedknown as Volume Points, to each of our products for use by the Company to determine a Member’s sales achievement level. We assignSee Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Operating Results
, for a Volume Point value to a product when it is first introduced into a market and the value is unaffected by subsequent exchange rate and price changes. The specific numberfurther description of Volume Points assigned to a product, generally consistent across all markets, is based on a Volume Point to suggested retail price ratio for similar products in the market. Management is evaluating our current approach to assigning and maintaining Volume Point values for certain products or markets. Any changes to this approach may have an impact on the use of Volume Points as a proxy for sales trends in future periods.

Points. To become a sales leader, or qualify for a higher level, Members must achieve specified Volume Point thresholds of product sales or earn certain amounts of royalty overrides during specified time periods and generally must

re-qualify
once each year. Qualification criteria can vary somewhat by market. As previously disclosed, in recent years we simplified ourWe have qualification criteria and created a longer-term, 12-month qualification methodmethods of up to 12 months to encourage a more gradual qualification. We believe a gradual qualification approach is important to the success and retention of new sales leaders and benefits the business in the long term as it allows new Members to obtain product and customer experience as well as additional training and education on Herbalife products, daily consumption based DMOs, and the business opportunity prior to becoming a sales leader.


Members, with the exception of those in China and our preferred members, earn the right to receive royalty overrides upon attaining the level of sales leader and above, and production bonuses upon attaining the level of Global Expansion Team and above. Once a Member becomes a sales leader, he or she has the opportunity to qualify by earning specified amounts of royalty overrides

The basis for the Global Expansion Team, the Millionaire Team or the President’s Team, and thereby receives production bonuses. We believe that the opportunity for Members to earn royalty overrides and production bonuses contributes significantly to our ability to retain our most active and productive Members.

The method for calculating distributor allowances and Marketing Plan payouts generally utilizesvaries depending on product and market and for 2020 utilized on a weighted-average basis approximately 90% to 95% of suggested retail price, depending on the product and market, to which we applyapplied discounts of up to 50% for distributor allowances and payout rates of up to 15% for royalty overrides, up to 7% for production bonuses, and approximately 1% for the Mark Hughes bonus.

Our business model in China includes unique features as compared We believe that the opportunity for Members to earn royalty overrides and production bonuses contributes significantly to our traditional business model in orderability to ensure compliance with Chinese government regulations. These include Company operated retail storesretain our most active and certification procedures for sales personnel when necessary. These and other features of our business model in China have resulted in, and will continue to result in, substantial ongoing costs.

Sales Leader Re-qualification and Retention

productive Members.

Our compensation system requires each sales leader to
re-qualify
for such status each year, prior to February, in order to maintain their 50% discount on products and be eligible to receive royalty payments. In February of each year, we demote from the rank of sales leader those Members who did not satisfy the
re-qualification
requirements during the preceding twelve months. The
re-qualification
requirement does not apply to new sales leaders (i.e. those who became sales leaders subsequent to the January
re-qualification
of the prior year). Volume Points are the basis for sales leader qualification. Typically, a Member accumulates Volume Points for a given sale at the time the Member pays for the product. However, effective beginning in May 2017, a Member does not receive Volume Point credit for a transaction in the United States until that product is sold to a customer at a profit and it is documented in compliance with the consent orderConsent Order entered into with the FTC.

Federal Trade Commission.

As of December 31, 2020, prior to our February
re-qualification
process, approximately 783,000 of our Members have attained the level of Sales Leader, of which approximately 676,000 have attained this level in the 94 markets globally where we use our worldwide Marketing Plan and 107,000 independent service providers operating under our China Marketing Plan.
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The table below reflects the number of sales leaders as of the end of February of the year indicated (subsequent to the annual
re-qualification
process) and sales leader retention rate by year and by region.

region:

 

 

Number of Sales Leaders

 

 

Sales Leaders Retention Rate

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2015

 

North America

 

 

61,362

 

 

 

79,305

 

 

 

88,866

 

 

 

74.8

%

 

 

58.3

%

 

 

58.4

%

Mexico

 

 

74,968

 

 

 

67,294

 

 

 

83,137

 

 

 

71.7

%

 

 

57.1

%

 

 

56.7

%

South & Central America

 

 

73,375

 

 

 

77,523

 

 

 

88,392

 

 

 

55.2

%

 

 

53.0

%

 

 

52.0

%

EMEA

 

 

101,101

 

 

 

87,500

 

 

 

82,025

 

 

 

62.2

%

 

 

63.6

%

 

 

68.4

%

Asia Pacific (excluding China)

 

 

124,555

 

 

 

107,871

 

 

 

127,252

 

 

 

49.7

%

 

 

43.8

%

 

 

43.9

%

Total Sales Leaders

 

 

435,361

 

 

 

419,493

 

 

 

469,672

 

 

 

60.9

%

 

 

54.2

%

 

 

54.2

%

China

 

 

47,244

 

 

 

41,890

 

 

 

32,222

 

 

 

 

 

 

 

 

 

 

 

 

 

Worldwide Total Sales Leaders

 

 

482,605

 

 

 

461,383

 

 

 

501,894

 

 

 

 

 

 

 

 

 

 

 

 

 

   
Number of Sales Leaders
   
Sales Leader Retention Rate
 
   
2020
   
2019
   
2018
   
2020
  
2019
  
2018
 
North America
   71,202    66,264    49,379    65.4  73.2  65.9
Mexico
   72,866    75,475    71,719    66.6  69.9  66.3
South and Central America
   61,535    64,929    66,325    60.7  62.2  59.0
EMEA
   130,438    121,297    107,528    70.6  71.3  68.7
Asia Pacific
   158,815    133,817    114,818    65.7  64.4  59.0
  
 
 
   
 
 
   
 
 
     
Total sales leaders
   494,856    461,782    409,769    66.5  67.9  63.6
China
   70,701    89,077    76,600     
  
 
 
   
 
 
   
 
 
     
Worldwide total sales leaders
   565,557    550,859    486,369     
  
 
 
   
 
 
   
 
 
     
The number of sales leaders as of December 31 will exceed the number immediately subsequent to the preceding
re-qualification
period because sales leaders qualify throughout the year but sales leaders who do not
re-qualify
are removed from the rank of sales leader the following February.

For the latest twelve month twelve-month
re-qualification
period ending January 2018,2021, approximately 63.6%67.9% of our sales leaders, excluding China, and Venezuela, re-qualified. Certain
re-qualified,
versus 66.5% for the twelve-month period ended January 2020. For each of these years, certain markets have institutedutilized a lower
re-qualification
threshold, and this figure includesthese figures include the effect of the lower threshold. The retention rate for 2018, if calculated absentExcluding the impact of the lower thresholdre-qualification thresholds, the retention rates for those markets,2021 and 2020 would have been 59.7%62.9% and 62.3%, which represents a slight decline from the comparable figure for the period ending January 2017 of 60.9%. With the newrespectively. Separately, with revised business requirements described above in place for U.S. and U.S. Territories, as described in
Network Marketing Program
below, we have introducednow utilize a
re-qualification
equalization factor for U.S. Members to better align their
re-qualification
thresholds with Members in other countries.countries, and retention results for each of the years presented include the effect of the equalization factor. We believe this factor preserves retention rate comparability across markets and time periods. Excludingmarkets. Also, for each of the impact of both the lower re-qualification thresholds and the equalization factor in the U.S. and U.S. Territories,years presented, the retention rateresults exclude certain markets for 2018 would have been 58.6%. Venezuelan Members were excluded from retention figures for all years presented aswhich, due to local operating conditions, sales leaders in the market were not required to requalify for the years ended January 2018 and January 2016 due to product supply limitations, 2017 retention figuresrequalify; such exclusions are not comparablematerial to other periods or markets due to revised requalification criteria, and 2015 demotion figures were amplified due to reinstatement of the qualification requirement after having been waived for 2014. Argentina is excluded from 2016 and 2015; demotion figures were amplified for 2016 due to reinstatement of the qualification requirement after having been waived for 2015.

our retention results.

Despite the slight decline inWe believe the sales leader retention rate of 67.9% for 2018, we believe the prior trend of increases in the rate in recent yearsyear ended January 2021 is the result of efforts we have made to improve the sustainability of sales leaders’ businesses, such as encouraging Members to obtain experience retailing Herbalife products before becoming a sales leader. As our business operations continue to evolve, including the establishmentsegmentation of a distinct “preferred member” category ofour Member base in certain markets and changes in sales leader

re-qualification
thresholds for other markets, management is evaluatingcontinues to evaluate the importance of sales leader retention rate information.
Member Technology
Many Members today also rely on the use of technology to support their businesses. With the increasing use of technology in our everyday lives and the increased Member activity on our online and mobile tools, we have also enhanced our product access and distribution network to support higher volumes of online or mobile orders. Placing orders through these media also allows Members and their customers to select home or business delivery options. We continue to adapt our access points to accommodate the increase in online or mobile ordering activity. We have also implemented information technology systems to support Members and their increasing demand to be more connected to Herbalife, their business, and their consumers. These systems include our Internet-based marketing and Member services platform with tools such as HN MyClub, Engage, HNconnect, BizWorks, MyHerbalife, GoHerbalife, and Herbalife.com. Additionally, we support a growing suite of
point-of-sale
tools to assist our Members with the ordering, tracking and their customer relationship management. These tools allow our Members to manage their business and communicate with their customers more efficiently and effectively.
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Business in China
Our business model in China includes unique features as compared to our traditional business model in order to ensure compliance with Chinese regulations. As a result, our business model in China differs from that used in other countries. Members in China are categorized differently than those in other countries. In China, we sell our products to and through independent service providers and sales representatives to customers and preferred customers, as well as through Company-operated retail platforms when necessary.
In China, while multi-level marketing is not permitted, direct selling is permitted. Chinese citizens who apply and become Members are referred to as sales representatives. These sales representatives are permitted to sell away from fixed retail locations in the provinces where we have direct selling licenses, including in the provinces of Jiangsu, Guangdong, Shandong, Zhejiang, Guizhou, Beijing, Fujian, Sichuan, Hubei, Shanxi, Shanghai, Jiangxi, Liaoning, Jilin, Henan, Chongqing, Hebei, Shaanxi, Tianjin, Heilongjiang, Hunan, Guangxi, Hainan, Anhui, Yunnan, Gansu, Ningxia, and Inner Mongolia. In Xinjiang province, where we do not have a direct selling license, we have a Company-operated retail store that can directly serve customers and preferred customers. With online orderings throughout China, there has been a declining demand in Company-operated retail stores.
Sales representatives receive scaled rebates based on the volume of products they purchase. Sales representatives who reach certain volume thresholds and meet certain performance criteria are eligible to apply to provide marketing, sales and support services. Once their application is accepted, they are referred to as independent service providers. Independent service providers are independent business entities that are eligible to receive compensation from Herbalife for the future.

PRODUCT RETURN AND BUYBACK POLICIES

marketing, sales and support services they provide so long as they satisfy certain conditions, including procuring the requisite business licenses, having a physical business location, and complying with all applicable Chinese laws and Herbalife rules.

In China, our independent service providers are compensated for marketing, sales support, and other services, instead of the Member allowances and royalty overrides utilized in our global Marketing Plan. The service hours and related fees eligible to be earned by the independent service providers are based on a number of factors, including the sales generated through them and through others to whom they may provide marketing, sales support and other services, the quality of their service, and other factors. Total compensation available to our independent service providers in China can generally be comparable to the total compensation available to other sales leaders globally. The Company does this by performing an analysis in our worldwide system to estimate the potential compensation available to the service providers, which can generally be comparable to that of sales leaders in other countries. After adjusting such amounts for other factors and dividing by each service provider’s hourly rate, we then notify each independent service provider the maximum hours of work for which they are eligible to be compensated in the given month. In order for a service provider to be paid, the Company requires each service provider to invoice the Company for their services.
RESOURCES
We seek to provide the highest quality products to our Members and their customers through our “seed to feed” strategy, which includes significant investments in quality ingredients from traceable sources, scientific personnel, product testing, and increasing the amount of self-manufacturing of our top products.
Ingredients
Our seed to feed strategy is rooted in using quality ingredients from traceable sources. Our procurement process for many of our botanical products now stretches back to the farms and includes self-processing of teas and herbal ingredients into finished raw materials at our own facilities. Our Changsha, China facility provides high quality tea and herbal raw materials to all our manufacturing plants as well as our third-party contract manufacturers around the world. We source the ingredients that we do not self-process from companies that we
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believe are well-established and reputable suppliers in their respective field. Our suppliers also utilize similar quality processes, equipment, expertise, and traceability as we do with our own modern quality processes. As part of ensuring high quality ingredients, we also test our incoming raw materials for compliance to potency, identity, and adherence to strict specifications.
Manufacturing
The next key component of our seed to feed strategy involves the high-quality manufacturing of these ingredients into finished products, which are produced at both third-party manufacturers and our own manufacturing facilities. We continue to execute on our long-term strategy of expanding and increasing our self-manufacturing. Our manufacturing facilities, known as Herbalife Innovation and Manufacturing Facilities, or HIMs, include HIM Lake Forest, HIM Winston-Salem, HIM Suzhou, and HIM Nanjing. HIM Winston-Salem, currently our largest manufacturing facility at approximately 800,000 square feet, and HIM Nanjing both have significant space for future expansion. Together, our HIM manufacturing facilities produce approximately 60% to 65% of our inner nutrition products sold worldwide.
We analyze our finished products for label claims and microbiological purity, thereby verifying product safety and shelf life. For our self-manufactured products, we do substantially all of our testing
in-house
at our modern quality control laboratories in the U.S. and China. We have major quality control labs in Southern California; Winston-Salem, North Carolina; Suzhou, China; Nanjing, China; and our Worldwide Quality Center of Excellence in Changsha, China. All HIM quality control labs contain modern analytical equipment and are backed by the expertise in testing and methods development of our scientists. In our U.S. HIM facilities, which produce products for the U.S. and most of our international markets, we operate and test to the regulations established by the U.S. Food and Drug Administration, or FDA, and strict Current Good Manufacturing Practice regulations, or CGMPs, for food, acidified food, and dietary supplements.
We work closely with our third-party manufacturers to ensure high quality products are produced and tested through a vigorous quality control process at audited contract manufacturer labs or third-party labs. For these products manufactured at other facilities, we combine four elements to ensure quality products: (1) the same selectivity and assurance in ingredients as noted above; (2) use of reputable, CGMP-compliant, quality-minded manufacturing partners; (3) a significant supplier qualification and annual audit program; and (4) significant product quality testing. During 2020, we purchased approximately 20% of our products include a customer satisfaction guarantee. Under this guarantee, any customerfrom our top three third-party manufacturers.
Intellectual property and branding
Marketing foods and supplement products on the basis of sound science means using ingredients in the exact composition and quantity as demonstrated to be effective in the relevant scientific literature. Use of these ingredients for their well-established purposes is by definition not novel, and for that reason, most food uses of these ingredients are not subject to patent protection. Notwithstanding the absence of patent protection, we do own proprietary formulations for substantially all of our weight management products and dietary and nutritional supplements. We take care in protecting the intellectual property rights of our proprietary formulas by restricting access to our formulas within the Company to those persons or preferred member whodepartments that require access to them to perform their functions, and by requiring our finished goods suppliers and consultants to execute supply and
non-disclosure
agreements that contractually protect our intellectual property rights. Disclosure of these formulas, in redacted form, is not satisfied with an also necessary to obtain product registrations in many countries. We also make efforts to protect certain unique formulations under patent law. We strive to protect all new product developments as the confidential trade secrets of the Company and its inventor employees.
We use the umbrella trademarks
Herbalife
®
,
Herbalife product for any reason may return it or any unused portion of it within 30 days fromNutrition
®
, and the time of receipt
Tri-Leaf
design worldwide, and protect several other trademarks and trade names related to the Member from whom it was purchased for a full refund or credit toward the exchange of another Herbalife product. In markets outside ofour products and operations, such as
Niteworks
®
and
Liftoff
®
. Our trademark registrations are issued through the United States if they returnPatent and Trademark Office, or
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USPTO, and comparable agencies in the foreign countries. We believe our trademarks and trade names contribute to our brand awareness.
To increase our brand awareness, we and our Members use a variety of tools and marketing channels. These can include anything from traditional media to social media and alliances with partners who can promote our goal of better living through nutrition. Herbalife Nutrition sponsorships of and partnerships with featured athletes, teams, and events promote brand awareness and the use of Herbalife products. We continue to build brand awareness with a goal towards becoming the most trusted brand in nutrition. We also work to leverage the power of our Member base as a marketing and brand-building tool. We maintain a brand style guide and brand asset library so that our Members have access to the Herbalife Nutrition brand logo and marketing materials for use in their marketing efforts.
Infrastructure
Our direct-selling business model enables us to grow our business with moderate investment in infrastructure and fixed costs. We incur no direct incremental cost to add a new Member in our existing markets, and our Member compensation varies directly with product sales. In addition, our Members also bear a portion of our consumer marketing expenses, and our sales leaders sponsor and coordinate Member recruiting and most meeting and training initiatives. Additionally, our infrastructure features scalable production and distribution of our products as a result of having our own manufacturing facilities and numerous third-party manufacturing relationships, as well as our global footprint of
in-house
and third-party distribution centers.
An important part of our seed to feed strategy is having an efficient infrastructure to deliver products to us on a timely basis,our Members and their customers. As the Member may obtain replacementshift in consumption patterns continues to reflect an increasing daily consumption focus, one focus of this strategy is to provide more product access points closer to our Members and their customers. We have both Company-operated and outsourced distribution points ranging from usour “hub” distribution centers in Los Angeles, Memphis, and Venray, Netherlands, to
mid-size
distribution centers in major countries, to small pickup locations spread throughout the world. We also expect to continue to improve our distribution channels relating to home delivery as we expect to see continued increased demands for such returned products.our products being shipped to our Members in certain of our larger markets. In addition to these distribution points, we partner with certain retail locations to provide Member pickup points in substantially all jurisdictions, we maintainareas which are not well serviced by our distribution points. We have also identified a buyback program pursuantnumber of methods and approaches that better support Members by providing access points closer to which we will repurchase products sold to a Member who has decided to leave the business. The buyback program has certain termswhere they do business and conditions that mayby improving product delivery efficiency through our distribution channels. Specific methods vary by markets and consider local Member needs and available resources. In aggregate, we have over 1,700 distribution points and partner retail locations around the world. In addition to our distribution points, we contract third
party-run
drop-off
locations where we can ship to and Members can pick up ordered products.
We leverage our technology infrastructure in order to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in technology, evolving industry and regulatory standards, emerging data security risks, and changing user patterns and preferences. We also continue to invest in our manufacturing and operational infrastructure to accelerate new products to market but it generally permits the returnand accommodate planned business growth. We invest in business intelligence tools to enable better analysis of unopenedour business and marketable condition products or sales materials purchased within the prior twelve month period in exchangeto identify opportunities for a refundgrowth. We will continue to build on these platforms to take advantage of the net price paid forrapid development of technology around the productglobe to support a more robust Member and customer experience. In addition, we leverage an Oracle business suite platform, which was upgraded in some markets, the original cost2017, to support our business operations, improve productivity and support our strategic initiatives. Our investment in technology infrastructure helps support our capacity to grow.
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Table of shipment to the Member. Together, product returns and buybacks were approximately 0.1% of product sales for each of the years ended December 31, 2017, 2016, and 2015.

Contents

REGULATION

General

In both our United States and foreign markets, we are affected by extensive laws, governmental regulations, administrative determinations and guidance, court decisions and similar constraints.constraints that regulate the conduct of our business. Such laws, regulations and other constraints exist at the federal, state or local levels in the United States and at all levels of government in foreign jurisdictions, includingand include regulations pertaining to: (1) the formulation, manufacturing, packaging, labeling, distribution, importation, sale, and storage of our products; (2) product claims and advertising, including direct claims and advertising by us, as well as claims and advertising by Members, for which we may be held responsible; (3) our network marketing program; (4) transfer pricing and similar regulations that affect the level of U.S. and foreign taxable income and customs duties; (5) taxation of our Members (which in some instances may impose an obligation on us to collect the taxes and maintain appropriate records); and (6) our international operations, such as import/export, currency exchange, repatriation and repatriation.

anti-bribery regulations; (7) antitrust issues; and (8) privacy and data protection. See Part I, Item 1A,

Risk Factors
, of this Annual Report on
Form 10-K
for additional information.
Products

In the United States, the formulation, manufacturing, packaging, holding, labeling, promotion, advertising, distribution, and sale of our products are subject to regulation by various federal governmental agencies, including (1) the Food and Drug Administration, or FDA, (2) the Federal Trade Commission, or FTC, (3) the Consumer Product Safety Commission, or CPSC, (4) the United States Department of Agriculture, or USDA, (5) the Environmental Protection Agency, or EPA, (6) the United States Postal Service, (7) United States Customs and Border Patrol, and (8) the Drug Enforcement Administration. Our activities also are regulated by various agencies of the states, localities, and foreign countries in which our products are manufactured, distributed, or sold. The FDA, in particular, regulates the formulation, manufacture, and labeling of
over-the-counter,
or OTC, drugs, conventional foods, dietary supplements, and cosmetics such as those distributed by us. The majority of the products marketed by us in the United States are classified as conventional foods or dietary supplements under the Federal Food, Drug and Cosmetic Act, or FFDCA. Internationally, the majority of products marketed by us are classified as foods, health supplements, or food supplements.

FDA regulations govern the preparation, packaging, labeling, holding, and distribution of foods, OTC drugs, cosmetics, and dietary supplements. Among other obligations, they require us and our contract manufacturers to meet relevant current good manufacturing practice, or cGMP,CGMP regulations for the preparation, packaging, holding, and distribution of OTC drugs and dietary supplements. The FDA also requires identity testing of all incoming dietary ingredients used in dietary supplements, unless a company successfully petitions for an exemption from this testing requirement in accordance with the regulations. The cGMPsCGMPs are designed to ensure that OTC drugdrugs and dietary supplement productssupplements are not adulterated with contaminants or impurities, and are labeled to accurately reflect the active ingredients and other ingredients in the products. Herbalife hasWe have implemented a comprehensive quality assurance program that is designed to maintain compliance with the CGMPs for products manufactured by us or on our behalf for distribution in the United States. As part of this program, we have regularly implemented enhancements, modifications and improvements to our manufacturing and corporate quality processes and believesprocesses. We believe that we and our contract manufacturers are compliant with the FDA’s cGMPCGMP and other applicable manufacturing regulations in the United States.


The U.S. Dietary Supplement Health and Education Act of 1994, or DSHEA, revised the provisions of FFDCA concerning the composition and labeling of dietary supplements. Under DSHEA, dietary supplement labeling may display structure/function claims that the manufacturer can substantiate, which are claims that the products affect the structure or function of the body, without prior FDA approval, but with notification to the FDA. They may not bear any claim that they can prevent, treat, cure, mitigate or diagnose disease (a drug claim). In addition,Apart from DSHEA, the agency permits companies to use

FDA-approved
full and qualified health claims for food and supplement products containing specific ingredients that meet stated requirements.

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U.S. law also requires that all serious adverse events occurring within the United States involving dietary supplements or OTC drugs be reported.reported to the FDA. We believe that we are in full compliance with this law having implemented a worldwide procedure governing adverse event identification, investigation and reporting. As a result of reported adverse events, we may from time to time elect, or be required, to remove a product from a market, either temporarily or permanently.

Some of the products marketed by us are considered conventional foods and are currently labeled as such. Within the United States, this category of products is subject to the federal Nutrition, Labeling and Education Act, or NLEA, and regulations promulgated under the NLEA. The NLEA regulates health claims, ingredient labeling and nutrient content claims characterizing the level of a nutrient in the product. The ingredients in conventional foods must either be generally recognized as safe by experts for the purposes to which they are put in foods, or be approved as food additives under FDA regulations.

The federal Food Safety Modernization Act, or FSMA, is also applicable to some of our business. We follow a food safety plan and have implemented preventive measures required by the FSMA. Foreign suppliers of our raw materials are also subject to FSMA requirements, and we have implemented a verification program to comply with the FSMA. Dietary supplements manufactured in accordance with cGMPsCGMPs and foods manufactured in accordance with the low acid food regulations are exempt.

In foreign markets, prior to commencing operations and prior to making or permitting sales of our products in the market, we may be required to obtain an approval, license or certification from the relevant country’s ministry of health or comparable agency. Where a formal approval, license or certification is not required, we nonetheless seek the advice of counsel regarding our compliance with applicable laws. Prior to entering a new market in which a formal approval, license or certificate is required, we work extensively with local authorities in order to obtain the requisite approvals. The approval process generally requires us to present each product and product ingredient to appropriate regulators and, in some instances, arrange for testing of products by local technicians for ingredient analysis. The approvals may be conditioned on reformulation of our products, or may be unavailable with respect to some products or some ingredients.

The FTC, which exercises jurisdiction over the advertising of all of our products in the United States, has in the past several years instituted enforcement actions against several dietary supplement and food companies and against manufacturers of weight loss products generally for false and misleading advertising of some of their products. In addition, the FTC has increased its scrutiny of the use of testimonials, which we also utilize, as well as the role of expert endorsers and product clinical studies. We cannot be sure that the FTC, or comparable foreign agencies, will not question our advertising or other operations in the future.

In Europe, where an EU Health Claim regulation is in effect, the European Food Safety Authority, or EFSA, issued opinions following its review of a number of proposed claims dossiers.documents. ESFA’s opinions, which have been accepted by the European Commission, are having a limiting effect onhave limited the use of certain nutrition-specific claims made for our products. Herbalife hasfoods and food supplements. Accordingly, we revised affected product labels to ensure regulatory compliance. Until all modified labels are in the marketplace, there is the possibility that one or more EU member states could take enforcement action.

We are subject to a permanent injunction issued in October 1986 pursuant to the settlement of an action instituted by the California Attorney General, the State Health Director and the Santa Cruz County District Attorney. We consented to the entry of this injunction without in any way admitting the allegations of the complaint. The injunction prevents us from making specified claims in advertising of our products, but does not prevent us from continuing to make specified claims concerning our products, provided that we have a reasonable basis for making the claims. The injunction also prohibits certain recruiting-related investments from Members and mandates that payments to Members be premised on retail value (as defined); the injunction provides that the Companywe may establish a system to verify or document such compliance.


Network Marketing Program

Our network marketing program is subject to a number of federal and state regulations administered by the FTC and various state agenciesregulators as well as regulations in foreign markets administered by foreign agencies. regulators.
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Regulations applicable to network marketing organizations generally are directed at ensuring that product sales ultimately are made to consumers and that advancement within the organization is based on sales of the organization’s products rather than investments in the organization or other
non-retail
sales related criteria. When required by law, we obtain regulatory approval of our network marketing program or, when this approval is not required, the favorable opinion of local counsel as to regulatory compliance.

On July 15, 2016, we reached a settlement with the FTC and entered into a proposed Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment, or the Consent Order, which resolved the FTC’s multi-year investigation of us. The Consent Order became effective on July 25, 2016, or the Effective Date, upon final approval by the U.S. District Court for the Central District of California. Pursuant to the Consent Order, we agreedimplemented and continue to implement certain new procedures and enhance certain existing procedures in the U.S., most and agreed to be subject to certain audits by an independent compliance auditor (Affiliated Monitors, Inc.) for a period of which we had 10 months from the Effective Date to implement.seven years. Among other requirements, the Consent Order requires us to categorize all existing and future Members in the U.S. as either “preferred members” – who are simply consumers who only wish to purchase product for their own household use or “distributors” – who are Members who wish to resell some products or build a sales organization. We also agreed to compensate distributors on U.S. eligible sales within their downline organizations, which include purchases by preferred members, purchases by a distributor for his or her personal consumption within allowable limits and sales of product by a distributor to his or her customers. The Consent Order also requires distributors to meet certain conditions before opening Nutrition Clubs and/or entering into leases for their Herbalife business in the United States.
The Consent Order also prohibits us from making expressly or by implication, any representationmisrepresentation regarding thecertain lifestyles or amount or level of income, including full-time or part-time income that a participant can reasonably expect to earn in our network marketing program, unless the representation is non-misleading and we possess competent and reliable evidence sufficient to substantiate that the representation is true.

program. The Consent Order also prohibits us and other persons who act in active concert with us from representingmisrepresenting that participation in the network marketing program will result in a lavish lifestyle and from using images or descriptions to represent or imply that participation in the program is likely to result in a lavish lifestyle. In addition, the Consent Order prohibits specified misrepresentations in connection with marketing the program, including misrepresentations regarding any fact material to participation such as the cost to participate or the amount of income likely to be earned. The Consent Order also requires us to clearly and conspicuously disclose all information materialrelated to participation in the marketing program, including our refund and buyback policy.

policy on certain company materials and websites.

The terms of the Consent Order do not change our going to market through direct selling by independent distributors, and compensating those distributors based upon the product they and their sales organization sell. We intendhave implemented new and enhanced procedures required by the terms of the Consent Order and will continue to do so. We continue to monitor the impact of the Consent Order regularly and our Boardboard of Directors hasdirectors established the Implementation Oversight Committee in connection with the Consent Order, and more recently, our Audit Committee assumed oversight of continued compliance with the Consent Order. The committee hasImplementation Oversight Committee had met and will meet regularly with management to oversee our compliance with the terms of the Consent Order. While we currently do not expect the settlementConsent Order to have a long-term and materiallymaterial adverse impact on our business and our Member base, our business and our Member base, particularly in the U.S., have been in the past, and may continue toin the future, be negatively impacted as we and they adjust to the changes.

However, the terms of the Consent Order and the ongoing costs of compliance may adversely affect our business operations, our results of operations and our financial condition. See Part I, Item 1A,

Risk Factors
, of this Annual Report on
Form 10-K
for a discussion of risks related to the settlement with the FTC.
On January 4, 2018, the FTC released its nonbinding Business Guidance Concerning Multi-Level Marketing, or MLM Guidance, to assist multi-level marketers, or MLMs, apply core consumer protection principles applicable to the multi-level marketing industry to their business practices. For example, theGuidance. The MLM Guidance explains, among other things, lawful and unlawful compensation structures, the treatment of personal consumption by participants in determining if an MLM’s compensation structure is unfair or deceptive, and how an MLM should approach representations to current and prospective participants. We believe our current business practices, which include new and enhanced procedures implemented in connection with the Consent Order, are in compliance with the MLM Guidance.

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Additionally, the FTC has promulgated nonbinding Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, thatwhich explain how the FTC interprets Section 5 of the FTC Act’s prohibition on unfair or deceptive acts or practices. Consequently, the FTC could bring a Section 5 enforcement action based on practices that are inconsistent with the Guides. Under the Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or service are required to clearly disclose the typical results that consumers can generally expect. Herbalife hasThe revised Guides also require advertisers to disclose connections between the advertiser and any endorsers that consumers might not expect, known as “material connections.” We have adapted itsour practices and rules regarding the practices of its Members to comply with the revised Guides and to comply with the Consent Order.


The terms of the Consent Order do not change our going to market through direct selling by independent distributors, and compensating those distributors based upon the product they and their sales organization sell. We have implemented new and enhanced procedures required by the terms of the Consent Order and will continue to do so; however, the terms of the Consent Order and the ongoing costs to comply therewith could adversely affect our business operations, our results of operations and our financial condition. See Part I, Item 1A – Risk Factors of this Annual Report on Form 10-K for a discussion of risks related to the settlement with the FTC.

We also are subject to the risk of private party challenges to the legality of our network marketing program both in the United States and internationally. For example, in

Webster v. Omnitrition International, Inc.
, 79 F.3d 776 (9th Cir. 1996), the network marketing program of Omnitrition International, Inc., or Omnitrition, was challenged in a class action by Omnitrition distributors who alleged that it was operating an illegal “pyramid scheme” in violation of federal and state laws. We believe that our network marketing program satisfies federal and other applicable state statutes and case law.

In some countries, regulations applicable to the activities of our Members also may affect our business because in some countries we are, or regulators may assert that we are, responsible for our Members’ conduct. In these countries, regulators may request or require that we take steps to ensure that our Members comply with local regulations. The types of regulated conduct include: (1) representations concerning our products; (2) income representations made by us and/or Members; (3) public media advertisements, which in foreign markets may require prior approval by regulators; (4) sales of products in markets in which the products have not been approved, licensed or certified for sale; and (5) classification by government agencies of our Members as employees of the Company.

In some markets, it is possible that improper product claims by Members could result in our products being reviewed by regulatory authorities and, as a result, being classified or placed into another category as to which stricter regulations are applicable. In addition, we might be required to make labeling changes.

We also are subject to regulations in various foreign markets pertaining to social security assessments and employment and severance pay requirements, import/export regulations and antitrust issues.requirements. As an example, in some markets, we are substantially restricted in the amount and types of rules and termination criteria that we can impose on Members without having to pay social security assessments on behalf of the Members and without incurring severance obligations to terminated Members. In some countries, we may be subject to these obligations in any event.

It is an ongoing part of our business to monitor and respond to regulatory and legal developments, including those that may affect our network marketing program. However, the regulatory requirements concerning network marketing programs do not include bright line rules and are inherently fact-based. An adverse judicial or regulatory determination with respect to our network marketing program could have a material adverse effect toon our business, financial condition, and operating results. An adverse determination could: (1) require us to make modifications to our network marketing program, (2)results and may also result in negative publicity, requirements to modify our network marketing plan, or (3) have a negative impact on Member morale. In addition, adverse rulings by courts in any proceedings challenging the legality of network marketing systems, even in those not involving us directly, could have a material adverse effect on our operations.

As has been reported in the national media, a hedge fund manager publicly raised allegations

Although questions regarding the legality of our network marketing program. Weprogram have come up in the past and may come up from time to time in the future, we believe, based in part upon guidance to the general public from the FTC, that our network marketing program is compliant with applicable law.

Transfer Pricing and Similar Regulations

In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by our U.S. orand local entities and are
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taxed accordingly. In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products.

Although we believe that we are in substantial compliance with all applicable regulations and restrictions, we are subject to the risk that governmental authorities could assert that additional taxes are owed based on findings of their audit of our transfer pricing and related practices and assert that additional taxes are owed.practices. For example, we are currently subject to pending or proposed audits that are at various levels of review, assessment or appeal in a number of jurisdictions involving transfer pricing issues, income taxes, duties, value added taxes, withholding taxes and related interest and penalties in material amounts. In some circumstances, additional taxes, interest and penalties have been assessed, and we will be required to appeal or litigate to reverse the assessments. We have taken advice from our tax advisors and believe that there are substantial defenses to the allegations that additional taxes are owed, and we are vigorously defending against the imposition of additional proposed taxes. The ultimate resolution of these matters may take several years, and the outcome is uncertain.


In the event that the audits or assessments are concluded adversely to us, we may or may not be able to offset or mitigate the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. The laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment and are not available with respect to all of the Company’s foreign income taxes. Additionally, U.S. Tax Reform creates additional restrictions on the utilization of U.S. foreign tax credits. Therefore, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future.

Compliance Procedures

As indicated above, Herbalife, our products and our network marketing program are subject, both directly and indirectly through Members’ conduct, to numerous federal, state and local regulations, both in the United States and foreign markets. Beginning in 1985, we began to institute formal regulatory compliance measures by developing a system to identify specific complaints against Members and to remedy any violations of Herbalife’s rules by Members through appropriate sanctions, including warnings, fines, suspensions and, when necessary, terminations. InWe prohibit Members from making therapeutic claims for our products, including in our manuals, seminars, and other training programs and materials, we emphasize that Members are prohibited from making therapeutic claims for our products.

materials.

Our general policy is to reject Member applications from individuals who do not reside in one of our approved markets.

In order to comply with regulations that apply to both us and our Members, we conduct considerable research into the applicable regulatory framework prior to entering any new market to identify all necessary licenses and approvals and applicable limitations onrelating to our operations in that market.market and then work to bring our operations into compliance with the applicable limitations and to maintain such licenses. Typically, we conduct this research with the assistance of local legal counsel and other representatives. We devote substantial resources to obtaining the necessary licenses and approvals and bringing our operations into compliance with the applicable limitations. We also research laws applicable to Member operations and revise or alter our Member manualsapplications, rules, and other training materials and programs to provide Members with guidelines for operating atheir independent business, marketing and distributing our products and similar matters, as required by applicable regulations in each market. WeWhile we have rules and guidelines for our Members and monitor their market conduct, we are, however, unable to monitorensure that our Members effectively to ensure that they refrain from distributingwill not distribute our products in countries where we have not commenced operations, and we do not devote significant resources to this type of monitoring.

operations.

In addition, regulations in existing and new markets often are ambiguous and subject to considerable interpretive and enforcement discretion by the responsible regulators. Moreover, even when we believe that we and our Members are initially in compliance with all applicable regulations, new regulations regularly are being added regularly and the interpretation of existing regulations is subject to change. Further, the content and impact of regulations to which we are subject may be influenced by public attention directed at us, our products, or our network marketing program, so that extensive adverse publicity about us, our products, or our network marketing program may resultincrease the likelihood regulatory scrutiny or action.
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HUMAN CAPITAL
We believe in increased regulatory scrutiny.

Employees

promoting a diverse, equitable, and inclusive work environment. We believe these practices are important to recruiting and retaining the talent to allow our organization to achieve its goals and objectives. We monitor the appropriate human capital needs of our departments and functions with particular focus on the areas where human capital resources are important to daily operations to ensure we can timely manufacture, distribute, and sell products to our Members. As of December 31, 2017,2020, we had approximately 8,3009,900 employees, of which approximately 2,4003,000 were located in the United States. These numbers do not include our Members, who are independent contractors. In certain countries, which include China and Mexico, we have employees who are subject to labor union agreementsagreements.

We have operations globally, requiring investment to assess local labor market conditions and thererecruit and retain the appropriate human capital. Having a business presence in multiple jurisdictions also requires us to monitor local labor and employment laws for which we often engage third-party advisors. We offer our employees wages and benefits packages that are in line with respective local labor markets and laws.
The
COVID-19
pandemic has increased the resources required to keep our employees safe and healthy and we are making what we believe are the necessary investments to achieve this goal. In response to the pandemic, we have taken several actions, including supporting our employees to work from home when possible, implementing safety measures in all our facilities, and offering incremental compensation to certain of our employees. We believe our proactive efforts have been no significantsuccessful in supporting our business interruptions asgrowth despite the obstacles and challenges presented by
COVID-19.
We are dependent on our third-party independent distributors to sell and promote our products to consumers. We frequently interact and work directly with our sales leader distributors to explore ways to support our mission and our third-party independent members’ businesses, and their customers’ personal goals of living a result of any labor disputes.

healthier and more active lifestyle. See the

Network Marketing Program – Member Compensation and Sales Leader Retention and Requalification
section above for sales leader and requalification metrics and further discussion on our sales leaders.
Available Information

Our Internet website address iswww.Herbalife.com.
www.herbalife.com
and our investor relations website is
ir.herbalife.com.
We make available free of charge on our website our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practical after we file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. This information is also available in print to any shareholder who requests it, with any such requests addressed to Investor Relations, 800 West Olympic Blvd., Suite 406, Los Angeles, CA 90015. Certain of these documents may also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov.
We also make available free of charge on our investor relations website at
ir.herbalife.com
our Principles of Corporate Governance, our Corporate Code of Business Conduct and Ethics, and the Charters of our Audit Committee, Nominating and Corporate Governance Committee, Compensation Committee, and CompensationESG Committee of our Board of Directors.

Unless expressly noted, the information on our website, including our investor relations website, or any other website is not incorporated by reference in this Annual Report on

Form 10-K
and should not be considered part of this Annual Report on
Form 10-K
or any other filing we make with the SEC.

Item 1A.

RISK FACTORS

R
isk Factors

Please carefully consider the following discussion of significant factors, events, and uncertainties that make an investment decision regarding our securities risky. The factors, events, uncertainties, and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, reputation, prospects, financial condition, operating results, cash flows, liquidity, and share price. These risk factors do not identify all risks that we face. We could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present material risks.
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Additionally, the
COVID-19
pandemic has also amplified many of the other risks discussed below to which we are subject. We are unable to predict the extent to which the pandemic and its related impacts will adversely impact our business, financial condition, and operating results as well as our share price. In addition, given the unpredictable, unprecedented, and fluid nature of the pandemic, it may also materially and adversely affect our business, financial condition, and operating results in ways that are not currently anticipated by or known to us or that we do not currently consider to present material risk.
Risk Factor Summary
This risk factor summary contains a high-level summary of certain of the principal factors, events and uncertainties that make an investment in our securities risky, including risks related to our business and industry, risks related to regulatory and legal matters, risks related to our international operations, risks related to our indebtedness and risks related to our common shares. The following summary is not complete and should be read together with the more detailed discussion of these and the other factors, events and uncertainties set forth below before making an investment decision regarding our securities. The principal factors, events and uncertainties that make an investment in our securities risky include the following:
Risks Related to UsOur Business and Our Business

Industry

Our failure to establish and maintain Member and sales leader relationships for any reason could negatively impact sales of our products and materially harm our business, financial condition, and operating results.

We distribute our products exclusively to and through independent Members, and we depend upon them directly for substantially all of our sales. Our Members, including our sales leaders, may voluntarily terminate their Member agreements with us at any time. To increase our revenue, we must increase the number of, or the productivity of, our Members. Accordingly, our success depends in significant part upon our ability to recruit, retain and motivate a large base of Members. The loss of a significant number of Members for any reason could negatively impact sales of our products and could impair our ability to attract new Members. In our efforts to attract and retain Members, we compete with other network marketing organizations, including those in the weight management, dietary and nutritional supplement and personal care and cosmetic product industries. Our operating results could be harmed if our existing and new business opportunities and products do not generate sufficient interest to retain existing Members and attract new Members.

Our Member organization has a high turnover rate, which is a common characteristic found in the direct selling industry. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K for additional information regarding sales leader retention rates.

Because we cannot exert the same level of influence or control over our independent Members as we could if they were they our own employees, our Members could fail to comply with applicable law or our Member rules and procedures, which could result in claims against us that could materially harm our business, financial condition, and operating results.
Adverse publicity associated with our Company or the direct-selling industry could materially harm our business, financial condition, and operating results.
Our failure to compete successfully could materially harm our business, financial condition, and operating results.
Since one of our products constitutes a significant portion of our net sales, significant decreases in consumer demand for this product or our failure to produce a suitable replacement, could materially harm our business, financial condition, and operating results.
Our contractual obligation to sell our products only through our Herbalife Member network and to refrain from changing certain aspects of our Marketing Plan may limit our growth.
Our failure to appropriately respond to changing consumer trends, preferences, and demand for new products and product enhancements could materially harm our Member relationships and our Members’ customer relationships and product sales or otherwise materially harm our business, financial condition, and operating results.
If we fail to further penetrate existing markets, the growth in sales of our products, along with our operating results could be negatively impacted.
Our business could be materially and adversely affected by natural disasters, other catastrophic events, acts of war or terrorism, cybersecurity incidents, pandemics, and/or other acts by third parties.
We depend on the integrity and reliability of our information technology infrastructure, and any related interruptions or inadequacies may have a material adverse effect on our business, financial condition, and operating results.
If any of our manufacturing facilities or third-party manufacturers fail to reliably supply products to us at required levels of quality or fail to comply with applicable laws, our financial condition and operating results could be materially and adversely impacted.
If we lose the services of members of our senior management team, our business, financial condition, and operating results could be materially harmed.
Our share price may be adversely affected by third parties who raise allegations about our Company.
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Risks Related to Regulatory and Legal Matters
Our products are affected by extensive regulations, and our failure or our Members’ failure to comply with any regulations could lead to significant penalties or claims, which could materially harm our financial condition and operating results.

Our network marketing program is subject to extensive regulation and scrutiny and any failure to comply, or alteration to our compensation practices in order to comply, with these regulations could materially harm our business, financial condition, and operating results.
We are subject to the Consent Order with the FTC, the effects of which, or any failure to comply therewith, could materially harm our business, financial condition, and operating results.
Our actual or perceived failure to comply with privacy and data protection laws, rules, and regulations could materially harm our business, financial condition, and operating results.
We are subject to material product liability risks, which could increase our costs and materially harm our business, financial condition, and operating results.
If we fail to protect our intellectual property, our ability to compete could be negatively affected, which could materially harm our financial condition and operating results.
If we infringe the intellectual property rights of others, our business, financial condition, and operating results could be materially harmed.
We may be held responsible for additional compensation, certain taxes, or assessments relating to the activities of our Members, which could materially harm our financial condition and operating results.
Risks Related to Our International Operations
A substantial portion of our business is conducted in foreign jurisdictions, exposing us to the risks associated with international operations.
We are subject to the anti-bribery laws, rules, and regulations of the United States and the other foreign jurisdictions in which we operate.
If we do not comply with transfer pricing, customs duties VAT, and similar regulations, we may be subject to additional taxes, customs duties, interest, and penalties in material amounts, which could materially harm our financial condition and operating results.
Our business in China is subject to general, as well as industry-specific, economic, political, and legal developments and risks and requires that we utilize a modified version of the business model we use elsewhere in the world.
The United Kingdom’s exit from the European Union could adversely impact us.
Risks Related to Our Indebtedness
The terms and covenants in our existing indebtedness could limit our discretion with respect to certain business matters, which could harm our business, financial condition, and operating results.
The conversion or maturity of our convertible notes may adversely affect our financial condition and operating results, and their conversion into common shares could have a dilutive effect that could cause our share price to go down.
Risks Related to Our Common Shares
Holders of our common shares may difficulties in protecting their interests because we are incorporated under Cayman Islands law.
Provisions of our articles of association and Cayman Islands law may impede a takeover or make it more difficult for shareholders to change the direction or management of the Company, which could reduce shareholders’ opportunity to influence management of the Company.
There is uncertainty as to shareholders’ ability to enforce certain foreign civil liabilities in the Cayman Islands.
U.S. Tax Reform may adversely impact certain U.S. shareholders of the Company.
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Risks Related to Our Business and Industry
Our failure to establish and maintain Member and sales leader relationships could negatively impact sales of our products and materially harm our business, financial condition, and operating results.
We distribute our products exclusively to and through our independent Members, and we depend on them directly for substantially all of our sales. To increase our revenue, we must increase the number and productivity of our Members. Accordingly, our success depends in significant part on our ability to recruit, retain, and motivate a large base of Members, including through an attractive compensation plan, the maintenance of an attractive product portfolio, and other incentives. The loss of a significant number of Members, our inability to generate sufficient interest in our business opportunities and products, or any legal or regulatory impact to our Members’ ability to conduct their business could negatively impact sales of our products and our ability to attract and retain Members, each of which could have a material adverse effect on our business, financial condition, and operating results. In our efforts to attract and retain Members, we compete with other direct-selling organizations. In addition, our Member organization has a high turnover rate, which is common in the direct-selling industry, in part because our Members, including our sales leaders, may easily enter and exit our network marketing program without facing a significant investment or loss of capital. For example, the upfront financial cost to become a Member is low, we do not have time or exclusivity requirements, we do not charge for any required training, and, in substantially all jurisdictions, we maintain a buyback program.
We believe the
COVID-19
pandemic could have an adverse impact on the pipeline of new Members and our Member turnover rate, and may impact our future net sales. See the
COVID-19
Pandemic
and
Sales by Geographic Region
sections in Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, of this Annual Report on
Form 10-K
for further discussion of the impacts of the
COVID-19
pandemic on our business and results of operations. For additional information regarding sales leader retention rates, see Part I, Item 1,
Business
, of this Annual Report on
Form 10-K.
Because we cannot exert the same level of influence or control over our Members as we could if they were our employees, our Members could fail to comply with applicable law or our rules and procedures, which could result in claims against us that could materially harm our business, financial condition, and operating results.
Our Members are independent contractors and, accordingly, we are not in a position to directly provide the same direction, motivation and oversight as we wouldcould if Members were our own employees. As a result, there can be no assurance that our Members will participate in our marketing strategies or plans, accept our introduction of new products, or comply with applicable legal requirements or our Member rules and procedures.

Extensive

We are subject to extensive federal, state, local, and localforeign laws, rules, and regulations that regulate our business, products, direct sales channel, and network marketing program. Because we have expanded into foreign countries, our policies and procedures plan. See the
Regulation
section of Part I, Item 1,
Business
, of this Annual Report on
Form 10-K
for our independent Members differ due to the different legal requirements of each country in which we do business.additional information. While we have implemented Member policies and procedures designed to govern Member conduct and to protect the goodwill associated with Herbalife trademarks and tradenames,Nutrition, it can be difficult to enforce these policies and procedures because of theour large number of Members and their status as independent status. Violations by our independent Members of applicable law or ofcontractors and because our policies and procedures in dealing with customers could reflect negatively on our products and operations and harm our business reputation.differ by jurisdiction as a result of varying local legal requirements. In addition, italthough we train our Members and attempt to monitor our Members’ marketing materials, we cannot ensure that our Members will comply with applicable legal requirements or our policies and procedures or that such marketing materials or other Member practices comply with applicable laws, rules, and regulations. It is possible that a court could hold us civilly or criminally accountable based on vicarious liability because ofliable for the actions of our independent Members.

Members, which could materially harm our business, financial condition, and operating results.

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Adverse publicity associated with our products, ingredientsCompany or network marketing program, or those of similar companies,the direct-selling industry could materially harm our business, financial condition, and operating results.

The size of our distribution forceMember organization, our operating results, and the results of our operationsshare price may be significantly affected by the public’s perception of the CompanyHerbalife Nutrition and similarother direct-selling companies. This perception is dependent upon opinions concerning:

concerning a number of factors, including:

the safety, quality, and qualityefficacy of our products, and ingredients;

as well as those of similar companies;

the safety and quality of similar products and ingredients distributed by other companies;

our Members;

our Members;

our network marketing program; and

program or the attractiveness or viability of the financial opportunities it may provide;

the direct sellingdirect-selling business generally.

generally;

Adverse publicity concerning any

actual or purported failure of our Companyby us or our Members to comply with applicable laws, rules, and regulations, including those regarding product claims and advertising, good manufacturing practices, the regulation of our network marketing program, the registration of our products for sale in our target markets or other aspects of our business,business;
the security of our information technology infrastructure; and
actual or alleged impropriety, misconduct, or fraudulent activity by any person formerly or currently associated with our Members or us.
Adverse publicity concerning any of the foregoing whether or not accurate or resulting in investigation, enforcement, or other legal or regulatory actions or the imposition of fines, penalties, or other sanctions, could have an adverse effect onnegatively impact the goodwill of our Company, and could negatively affect our ability to attract, motivate, and retain Members, which would negatively impactand our ability to generate revenue. We cannot ensure that all of our Members will comply with applicable legal requirements relating to the advertising, labeling, licensing or distribution of our products.

In addition, our Members’ and consumers’ perception of the safetyHerbalife Nutrition and quality of our products and ingredientsdirect-selling business as well as similar products and ingredients distributed by other companies can be significantly influenced by media attention, publicized scientific research or findings, widespread product liability claims, and other publicity, concerning our products or ingredients or similar products and ingredients distributed by other companies. Adverse publicity, whether or not it is legitimate. For example, as a result of the prevalence and marked increase in the use of blogs, social media platforms, and other forms of Internet-based communications, the opportunity for dissemination of information, both accurate and inaccurate, is seemingly limitless and readily available, and often does not provide any opportunity for correction or resulting from consumers’ use or misuse of our products,other redress.
Adverse publicity that associates consumptionuse of our products or ingredients, or any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similarany such products, or claims that any such products are ineffective, inappropriately labeled, or have inaccurate instructions as to their use, could lead to lawsuits or other legal or regulatory challenges and could negativelymaterially and adversely impact our reputation, the market demand for our products, orand our general business.

From time to time, we receive inquiries from government agenciesbusiness, financial condition, and third parties requesting information concerning our products. We fully cooperate with these inquiries including, when requested, by the submission of detailed technical dossiers addressing product composition, manufacturing, process control, quality assurance, and contaminant testing. Further, we periodically respond to requests from regulators for additional information regarding product-specific adverse events. We are confident in the safety of our products when used as directed. However, there can be no assurance that regulators in these or other markets will not take actions that might delay or prevent the introduction of new products, or require the reformulation or the temporary or permanent withdrawal of certain of our existing products from their markets.

operating results.

Adverse publicity relating to us our products or our operations, including our network marketing program or the attractiveness or viability of the financial opportunities provided thereby, has had, and could again have, a negative effect on our ability to attract, motivate, and retain Members, and it could also affecton our share price. InFor example, the mid-1980s, our products and marketing program became the subject of regulatory scrutiny in the United States, resulting in large part from claims and representations made about our products by our Members, including impermissible therapeutic claims. The resulting adverse publicity from the 1986 permanent injunction entered in California caused a rapid, substantial loss of Members in the United States and a corresponding reduction in sales beginning in 1985. In addition, in late 2012, a hedge fund manager publicly raisedSee also the risk factor titled “
Our share price may be adversely affected by third parties who raise allegations regarding the legality ofabout our network marketing program and announced that his fund had taken a significant short position regarding our common shares, leading to intense public scrutiny and governmental inquiries, and significant stock price volatility.Company.
We expect that negativeadverse publicity will, from time to time, continue to negatively impact our business in particular markets and may adversely affect our share price.

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Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancementscompete successfully could significantlymaterially harm our Member and customer relationships and product sales and harm ourbusiness, financial condition, and operating results.

Our business is subject to changing consumer trends and preferences, especially with respect to weight management, targeted nutrition, energy, sports & fitness, and other nutrition products. Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes. Furthermore, the nutritional supplement industry is characterized by rapid and frequent changes in demand for products and new product introductions and enhancements. Our failure to accurately predict these trends could negatively impact consumer opinion of our products, which in turn could harm our customer and Member relationships and cause the loss of sales. The success of our new product offerings and enhancements depends upon a number of factors, including our ability to:

accurately anticipate customer needs;

innovate and develop new products or product enhancements that meet these needs;

successfully commercialize new products or product enhancements in a timely manner;

price our products competitively;

manufacture and deliver our products in sufficient volumes and in a timely manner; and

differentiate our product offerings from those of our competitors.


If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete, which could negatively impact our revenues, financial condition and operating results.

Due to the high level of competition in our industry, we might fail to retain our customers and Members, which would harm our financial condition and operating results.

The business of developing and marketing weight management and other nutrition and personal care products is highly competitive and sensitive to the introduction of new products orand weight management plans, including various prescription drugs, which may rapidly capture a significant share of the market. These market segmentsOur competitors include numerous manufacturers, distributors, marketers, retailersmanufacturers; distributors; marketers; online, specialty, mass, and other retailers; and physicians that actively compete for the business of consumers both in the United States and abroad. In addition, we are subject to increasing competition from sellers that utilize electronic commerce. Some of theseour competitors have longer operating histories, significantly greater financial, technical, product development, marketingresources, better-developed and more innovative sales resources,and distribution channels and platforms, greater name recognition, and larger established customer bases and better-developed distribution channels than we do. Our present orand future competitors may be able to better withstand reductions in prices or other adverse economic or market conditions than we can; develop products that are comparable or superior to those we offer,offer; adapt more quickly than we door effectively to new technologies, changing regulatory requirements, evolving industry trends and standards, orand customer requirements than we can; and/or devote greater resources to the development, promotion, and sale of their products than we do. For example, if our competitors develop other diet or weight management products that prove to be more effective than our products, demand for our products could be reduced. Accordingly, competition may intensify and we may not be able to compete effectively in our markets.

We are also subject to significant competition for the recruitment of Members from other network marketingdirect-selling organizations, including those that market weight management products, dietary and nutritional supplements, personal care products, and other types of products, as well as those organizations in which former employees or Members of the Company are involved. We compete for global customers and Members with regard to weight management, nutritional supplement and personal care products. Our competitors include both direct selling companies such as NuSkin Enterprises, Nature’s Sunshine, Alticor/Amway, Melaleuca, Avon Products, Oriflame, Omnilife, Tupperware and Mary Kay, as well as retail establishments such as Weight Watchers, Jenny Craig, General Nutrition Centers, Wal-Mart and retail pharmacies.

In addition, because the industry in which we operate is not particularly capital intensive or otherwise subject to high barriers to entry, it is relatively easy for new competitors to emerge that will compete with us, including for our Members and their customers. Furthermore, the fact thatAccordingly, competition may intensify and we may not be able to compete effectively in our markets. If we are not able to retain our Members may easily enter and exittheir customers or otherwise compete successfully, our network marketing program contributes to the level of competition that we face. For example, a Member can enter or exit our network marketing system with relative ease at any time without facing a significant investment or loss of capital because (1) we have a low upfront financial cost to become a Herbalife Member, (2) we do not require any specific amount of time to work as a Member, (3) we do not charge Members for any training that we might require, (4) we do not prohibit a new Member from working with another company, and (5) in substantially all jurisdictions, we maintain a buyback program pursuant to which we will repurchase products sold to a Member who has decided to leave the business. Our ability to remain competitive therefore depends, in significant part, on our success in recruiting and retaining Members through an attractive compensation plan, the maintenance of an attractive product portfolio and other incentives. We cannot ensure that our programs for recruitment and retention of Members will be successful and if they are not, ourbusiness, financial condition, and operating results would be harmed.

We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints both domestically and abroad, and our failure or our Members’ failure to comply with these constraints could lead to the imposition of significant penalties or claims, which could harm our financial condition and operating results.

In both domestic and foreign markets, the formulation, manufacturing, packaging, labeling, distribution, advertising, importation, exportation, licensing, sale and storage of our products are affected by extensive laws, governmental regulations, administrative determinations, court decisions and other similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at all levels of government in foreign jurisdictions. There can be no assurance that we or our Members are in compliance with all of these regulations. Our failure or our Members’ failure to comply with these regulations or new regulations could disrupt our Members’ sale of our products, or lead to the imposition of significant penalties or claims and could negatively impact our business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations, such as those relating to genetically modified foods, may result in significant compliance costs or discontinuation of product sales and may negatively impact the marketing of our products, resulting in significant loss of sales revenues.


The Consent Order prohibits us from making, or allowing our Members to make, any representation regarding the amount or level of income, including full-time or part-time income, that a participant can reasonably expect to earn in our network marketing program, unless the representation is non-misleading and we possesses competent and reliable evidence sufficient to substantiate that the representation is true. The Consent Order also prohibits us and other persons who act in active concert with us from representing that participation in the network marketing program will result in a lavish lifestyle and from using images or descriptions to represent or imply that participation in the program is likely to result in a lavish lifestyle. In addition, the Consent Order prohibits specified misrepresentations in connection with marketing the program, including misrepresentations regarding any fact material to participation such as the cost to participate or the amount of income likely to be earned. The Consent Order also requires us to clearly and conspicuously disclose all information material to participation in the marketing program, including our refund and buyback policy before the participant pays any money to us.

On January 4, 2018, the FTC released its Business Guidance Concerning Multi-Level Marketing, or MLM Guidance, in order to help multi-level marketers, or MLMs, apply core consumer protection principles applicable to the multi-level marketing industry to their business practices. Although the MLM Guidance is not binding, the MLM Guidance explains, among other things, how the FTC distinguishes between MLMs with lawful and unlawful compensation structures, how MLMs with unfair or deceptive compensation structures harm consumers, how the FTC treats personal or internal consumption by participants in determining if an MLM’s compensation structure is unfair or deceptive, and how an MLM should approach representations to current and prospective participants. Although we believe our current business practices, which include new and enhanced procedures implemented in connection with the Consent Order, are in compliance with the MLM Guidance, there can be no assurances that the FTC or other third parties would agree.

The FTC revised its Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, which became effective on December 1, 2009. Although the Guides are not binding, they explain how the FTC interprets Section 5 of the FTC Act’s prohibition on unfair or deceptive acts or practices. Consequently, the FTC could bring a Section 5 enforcement action based on practices that are inconsistent with the Guides. Under the revised Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or service are required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides, which allowed advertisers to describe atypical results in a testimonial as long as they included a disclaimer such as “results not typical”, the revised Guides no longer contain such a safe harbor. The revised Guides also add new examples to illustrate the long-standing principle that “material connections” between advertisers and endorsers (such as payments or free products), connections that consumers might not expect, must be disclosed. Herbalife has revised its marketing materials to be compliant with the revised Guides and the Consent Order. However, it is possible that our use, and that of our Members, of testimonials in the advertising and promotion of our products, including but not limited to our weight management products and our income opportunity, will be significantly impacted and therefore might negatively impact our sales.

Governmental regulations in countries where we plan to commence or expand operations may prevent or delay entry into those markets. In addition, our ability to sustain satisfactory levels of sales in our markets is dependent in significant part on our ability to introduce new products into such markets. However, governmental regulations in our markets, both domestic and international, can delay or prevent the introduction, or require the reformulation or withdrawal, of certain of our products. Any such regulatory action, whether or not it results in a final determination adverse to us, could create negative publicity, with detrimental effects on the motivation and recruitment of Members and, consequently, on sales.

We are subject to rules of the Food and Drug Administration, or FDA, for current good manufacturing practices, or cGMPs, for the manufacture, packing, labeling and holding of dietary supplements and over-the-counter drugs distributed in the United States. Herbalife has implemented a comprehensive quality assurance program that is designed to maintain compliance with the cGMPs for products manufactured by or on behalf of Herbalife for distribution in the United States. However, if Herbalife should be found not to be in compliance with cGMPs for the products we self-manufacture, it could negatively impact our reputation and ability to sell our products even after any such situation had been rectified. Further, if contract manufacturers that manufacture products for Herbalife fail to comply with the cGMPs, this could negatively impact Herbalife’s reputation and ability to sell its products even though Herbalife is not directly liable under the cGMPs for such compliance. In complying with the dietary supplement cGMPs, we have experienced increases in production costs as a result of the necessary increase in testing of raw ingredients, work in process and finished products.


Since late 2012, a hedge fund manager has made and continues to make allegations regarding the Company and its network marketing program. We believe these allegations are without merit and are vigorously defending ourselves against such claims, including proactively reaching out to governmental authorities about what we believe is manipulative activity with respect to our securities. Because of these allegations, we and others have received and may receive additional regulatory and governmental inquiries. For example, we have previously disclosed inquiries from the FTC, SEC and other governmental authorities. In the future, these and other governmental authorities may determine to seek information from us and other persons relating to these same or other allegations. If we believe any governmental or regulatory inquiry or investigation is or becomes material, it will be disclosed individually. Consistent with our policies, we have cooperated and will continue to fully cooperate with any governmental or regulatory inquiries or investigations.

Our network marketing program could be found to be not in compliance with current or newly adopted laws or regulations in one or more markets, which could prevent us from conducting our business in these markets or require us to alter compensation practices under our network marketing program, and harm our financial condition and operating results.

Our network marketing program is subject to a number of federal and state regulations administered by the FTC and various federal and state agencies in the United States as well as regulations on direct selling in foreign markets administered by foreign agencies. We are subject to the risk that, in one or more markets, our network marketing program could be found by federal, state or foreign regulators not to be in compliance with applicable law or regulations or we may be required to alter compensation practices under our network marketing program in order to comply with applicable law or regulations. As previously disclosed, we entered into the Consent Order with the FTC to settle the FTC’s multi-year investigation into our business for compliance with these regulations. Another example is the 1986 permanent injunction entered in California in proceedings initiated by the California Attorney General. There can be no assurances other federal, state attorneys general or foreign regulators will not take similar actions.

Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, sometimes referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization’s products rather than investments in the organization or other non-retail sales-related criteria. The regulatory requirements concerning network marketing programs do not include “bright line” rules and are inherently fact-based and, thus, we are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. While we believe we are in compliance with these regulations, including those enforced by the FTC and the permanent injunction in California, and are compliant with the Consent Order, there is no assurance any federal, state or foreign courts or agencies or the independent compliance auditor under the Consent Order would agree, including a federal court or the FTC in respect of the Consent Order or a court or the California Attorney General in respect to the permanent injunction.

The ambiguity surrounding these laws can also affect the public perception of the Company. Specifically, in late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program and announced that his fund had taken a significant short position regarding our common shares, leading to intense public scrutiny and significant stock price volatility. The failure of our network marketing program to comply with current or newly adopted laws or regulations, the Consent Order or the California injunction or any allegations or charges to that effect brought by federal, state, or foreign regulators could negatively impact our business in a particular market or in general and may adversely affect our share price.

We are also subject to the risk of private party challenges to the legality of our network marketing program, whether as a result of the Consent Order or otherwise. Some network marketing programs of other companies have been successfully challenged in the past, while other challenges to network marketing programs of other companies have been defeated. Adverse judicial determinations with respect to our network marketing program, or in proceedings not involving us directly but which challenge the legality of network marketing systems, in any other market in which we operate, could negatively impact our business.


We are subject to the Consent Order with the FTC, the effects of which, or any failure to comply therewith, could harm our financial condition and operating results.

As previously disclosed, on July 15, 2016, we reached a consensual resolution with the FTC regarding its multi-year investigation of our business resulting in the entry into a Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment in the U.S. District Court for the Central District of California. The Consent Order became effective on July 25, 2016 upon final approval by the Court. As part of the Consent Order, we agreed to make a payment of $200 million and to implement certain new procedures and enhance certain existing procedures in the United States. We also agreed to be subject to certain audits by an independent compliance auditor, or the ICA, for a period of seven years; requirements regarding compliance certification and record creation and maintenance; and a prohibition on misrepresentations and misleading claims regarding, among other things, income and lavish lifestyles. The FTC and ICA will also have the right to inspect Company records and request additional compliance reports for purposes of conducting audits pursuant to the Consent Order. In September 2016, we and the FTC mutually selected Affiliated Monitors, Inc. to serve as the ICA. The terms of the Consent Order are described in greater detail in our Current Report on Form 8-K filed on July 15, 2016.

The Consent Order includes a number of restrictions and requirements and therefore creates compliance risks, and while we believe we are fully compliant with the Consent Order, there is no guarantee that we are fully compliant or in the future will continue to be fully compliant with the Consent Order. We do not believe the Consent Order changes our business model as a direct selling company. However, compliance with the Consent Order required us to implement enhanced procedures regarding, among other things, tracking retail sales and internal consumption by distributors. We have instituted controls and procedures and developed technology solutions that we believe address these Consent Order requirements, including tools and software used by distributors to, among other things, document their sales and more efficiently track and manage their customer base. However, there can be no assurances that some or all of these controls and procedures and technology solutions will continue to operate as expected. Any failure of these systems to operate as designed could cause us to fail to maintain the records required under, or otherwise violate terms of, the Consent Order. Compliance with the Consent Order will require the cooperation of Members and, while we have updated our training programs and policies to address the Consent Order and expect our Members to cooperate, we do not have the same level of influence or control over our Members as we could were they our own employees. Failure by our Members to comply with the relevant aspects of the Consent Order could be a violation of the Consent Order and impact our ability to comply. While we believe we are compliant with the Consent Order and our board of directors has established the Implementation Oversight Committee, a committee which meets regularly with management to oversee our compliance with the terms of the Consent Order, there can be no assurances that the FTC or ICA would agree now or will agree in the future. In the event we are found to be in violation of the Consent Order, the FTC could, among other things, take corrective actions such as initiating enforcement actions, seeking an injunction or other restrictive orders and imposing civil monetary penalties against us and our officers and directors.

The Consent Order has impacted, and may continue to impact, our business operations, including our net sales and profitability. For example, the Consent Order imposes certain requirements regarding the verification and receipting of sales and there can be no assurances that these or other requirements of the Consent Order, our compliance therewith and the business procedures implemented as a result thereof, will not continue to lead to reduced sales, whether as a result of undocumented sales activity or otherwise. The Consent Order also imposes restrictions on distributors’ ability to open Nutrition Clubs in the United States. Additionally, the procedures described above, and any other actions taken in respect of continuing compliance efforts with the Consent Order, may continue to be costly. These extensive costs or any amounts in excess of our cost estimates could have a material adverse effect on our financial condition and results of operations. Our Members may also disagree with our decision to enter into the Consent Order, whether because they disagree with certain terms thereof, they believe it will negatively impact their personal business or they would not have settled the investigation on any terms. The Consent Order also provides that if the total eligible U.S. sales on which compensation may be paid falls below 80% of the Company’s total U.S. sales for a given year, compensation payable to distributors on eligible U.S. sales will be capped at 41.75% of the Net Rewardable Sales amount as defined in the Consent Order. While we believe we will continue to achieve the required 80% threshold necessary to pay full distributor compensation, this result is subject to the review and audit of the FTC and ICA and they may not agree with our conclusions. Because our business is dependent on our Members, our business operations and net sales could be adversely affected if U.S. distributor compensation is restricted or if any meaningful number of Members are dissatisfied, choose to reduce activity levels or leave our business altogether. Member dissatisfaction may also negatively impact the willingness of new Members to join Herbalife as a distributor. Further, management and the board of directors may be required to focus a substantial amount of time on compliance activities, which could divert their attention from running and growing our business. We may also be required to suspend or defer many or all of our current or anticipated business development, capital deployment and other projects unrelated to compliance with the Consent Order to allow resources to be focused on our compliance efforts, which could cause us to fall short of our guidance or analyst or investor expectations. In addition, while we believe the Consent Order will set new standards within the industry, our competitors are not required to comply with the Consent Order and may not be subject to similar actions, which could limit our ability to effectively compete for Members, customers and ultimately net sales.


The Consent Order also creates additional third-party risks. Although the Consent Order resolved the FTC’s multi-year investigation into the Company, it does not prevent other third-parties from bringing actions against us, whether in the form of other state, federal or foreign regulatory investigations or proceedings, or private litigation, any of which could lead to, among other things, monetary settlements, fines, penalties or injunctions. Although we neither admitted nor denied the allegations in the FTC’s complaint in agreeing to the terms of the Consent Order (except as to the Court having jurisdiction over the matter), third-parties may use specific statements or other matters addressed in the Consent Order as the basis for their action. The Consent Order or any subsequent legal or regulatory claim may also lead to negative publicity, whether because some view it as a condemnation of the Company or our direct selling business model or because other third parties use it as justification to make unfounded and baseless assertions against us, our business model or our Members. An increase in the number, severity or scope of third-party claims, actions or public assertions may result in substantial costs and harm to our reputation. The Consent Order may also impact third parties’ willingness to work with us as a company.

We believe we have complied with the Consent Order and we will continue to do so. However, the impact of the Consent Order on our business, including the effectiveness of the controls, procedures and technology solutions implemented to comply therewith, and on our business and our member base, could be significant. If our business is adversely impacted, it is uncertain as to whether, or how quickly, we would be able to rebuild, irrespective of market conditions. Our financial condition and results of operations could be harmed if we fail to continue to comply with the Consent Order, if costs related to compliance exceed our estimates, if it continues to have a negative impact on net sales, or if it leads to further legal, regulatory, or compliance claims, proceedings, or investigations or litigation.

A substantial portion of our business is conducted in foreign markets, exposing us to the risks of trade or foreign exchange restrictions, increased tariffs, foreign currency fluctuations, disruptions or conflicts with our third party importers and similar risks associated with foreign operations.

Approximately 80% of our net sales for the year ended December 31, 2017 were generated outside the United States, exposing our business to risks associated with foreign operations. For example, a foreign government may impose trade or foreign exchange restrictions or increased tariffs, or otherwise limit or restrict our ability to import products into a country, any of which could negatively impact our operations. We are also exposed to risks associated with foreign currency fluctuations. For instance, purchases from suppliers are generally made in U.S. dollars while sales to Members are generally made in local currencies. Accordingly, strengthening of the U.S. dollar versus a foreign currency could have a negative impact on us. Although we engage in transactions to protect against risks associated with foreign currency fluctuations, we cannot be certain any hedging activity will effectively reduce our exchange rate exposure. Additionally, we may be negatively impacted by conflicts with or disruptions caused or faced by our third party importers, as well as conflicts between such importers and local governments or regulating agencies. Our operations in some markets also may be adversely affected by political, economic and social instability in foreign countries. Our operations, both domestically and internationally, could also be affected by laws and regulations related to immigration. For example, current and future tightening of U.S. immigration controls may adversely affect the residence status of non-U.S. employees in our U.S. locations or our ability to hire new non-U.S. employees in such locations and may adversely affect the ability of non-U.S. Members from entering the United States. As we continue to focus on expanding our existing international operations, these and other risks associated with international operations may increase, which could harm our financial condition and operating results.

Another risk associated with our international operations is the possibility that a foreign government may impose foreign currency remittance restrictions. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange rates, we may not be able to immediately repatriate cash at the official exchange rate. If this should occur, or if the official exchange rate devalues, it may have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows. For example, currency restrictions enacted by the Venezuelan government continue to be restrictive and have impacted the ability of our subsidiary in Venezuela, or Herbalife Venezuela, to obtain U.S. dollars in exchange for Venezuelan Bolivars at the official foreign exchange rate. These currency restrictions and current pricing restrictions continue to limit Herbalife Venezuela’s ability to import U.S. dollar denominated raw materials and finished goods which in addition to the Venezuelan Bolivar devaluations has significantly negatively impacted our Venezuelan operations. If we are unsuccessful in implementing any financially and economically viable strategies, including local manufacturing, we may be required to fundamentally change our business model or suspend or cease operations in Venezuela. Also, if the foreign currency and pricing or other restrictions in Venezuela intensify or do not improve and, as a result, impact our ability to control our Venezuelan operations, we may be required to deconsolidate Herbalife Venezuela for U.S. GAAP purposes and would be subject to the risk of further impairments.


Our business in China is subject to general, as well as industry-specific, economic, political and legal developments and risks in China and requires that we utilize a modified version of the business model we use elsewhere in the world.

Our expansion of operations into China and the continued success of our business in China are subject to risks and uncertainties related to general economic, political and legal developments in China, among other things. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies and issuing necessary licenses to conduct business. In addition, we could face additional risks resulting from changes in China’s data privacy and cybersecurity requirements. Accordingly, any adverse change in the Chinese economy, the Chinese legal system or Chinese governmental, economic or other policies could have a material adverse effect on our business in China and our prospects generally.

China has published regulations governing direct selling and prohibiting pyramid promotional schemes, and a number of administrative methods and proclamations have been issued. These regulations require us to use a modified version of the business model we use in other markets. To allow us to operate under these regulations, we have created and introduced a model specifically for China based on our understanding as to how Chinese regulators are interpreting and enforcing these regulations, our interpretation of applicable regulations and our understanding of the practices of other international direct selling companies in China.

In China, we have sales representatives who are permitted by the terms of our direct selling licenses to sell away from fixed retail locations in the provinces of Jiangsu, Guangdong, Shandong, Zhejiang, Guizhou, Beijing, Fujian, Sichuan, Hubei, Shanxi, Shanghai, Jiangxi, Liaoning, Jilin, Henan, Chongqing, Hebei, Shaanxi, Tianjin, Heilongjiang, Hunan, Guangxi, Hainan, Anhui, Yunnan, Gansu, Ningxia, and Inner Mongolia. In Xinjiang province, where the Company does not have a direct selling license, it has a Company-operated retail store that can directly serve customers and preferred customers. With online orderings throughout China, there has been a declining demand in Company-operated retail stores.

We also engage independent service providers who meet both the requirements to operate their own business under Chinese law as well as the conditions set forth by Herbalife to provide marketing, sales support and other services to Herbalife customers. In China, our independent service providers are compensated for marketing, sales support, and other services instead of the Member allowances and royalty overrides utilized in our global marketing plan. The service hours and related fees eligible to be earned by the independent service providers are based on a number of factors, including the sales generated through them and through others to whom they may provide marketing, sales support and other services, the quality of their service, and other factors. Total compensation available to our independent service providers in China can generally be comparable to the total compensation available to other sales leaders globally.

These business model features in China are not common to the business model we employ elsewhere in the world, and based on the direct selling licenses we have received and the terms of those which we hope to receive in the future to conduct a direct selling enterprise in China, our business model in China will continue to incorporate some or all of these features. The direct selling regulations require us to apply for various approvals to conduct a direct selling enterprise in China. The process for obtaining the necessary licenses to conduct a direct selling business is protracted and cumbersome and involves multiple layers of Chinese governmental authorities and numerous governmental employees at each layer. While direct selling licenses are centrally issued, such licenses are generally valid only in the jurisdictions within which related approvals have been obtained. Such approvals are generally awarded on local and provincial bases, and the approval process requires involvement with multiple ministries at each level. Our participation and conduct during the approval process is guided not only by distinct Chinese practices and customs, but is also subject to applicable laws of China and the other jurisdictions in which we operate our business, including the United States, as well as our internal code of ethics. There is always a risk that in attempting to comply with local customs and practices in China during the application process or otherwise, we will fail to comply with requirements applicable to us in China itself or in other jurisdictions, and any such failure to comply with applicable requirements could prevent us from obtaining the direct selling licenses or related local or provincial approvals. Furthermore, we rely on certain key personnel in China to assist us during the approval process, and the loss of any such key personnel could delay or hinder our ability to obtain licenses or related approvals. For all of the above reasons, there can be no assurance that we will obtain additional direct selling licenses, or obtain related approvals to expand into any or all of the localities or provinces in China that are important to our business. Our inability to obtain, retain, or renew any or all of the licenses or related approvals that are required for us to operate in China could negatively impact our business.


Additionally, although certain regulations have been published with respect to obtaining and operating under such approvals and otherwise conducting business in China, other regulations are pending and there continues to be uncertainty regarding the interpretation and enforcement of Chinese regulations. The regulatory environment in China is evolving, and officials in the Chinese government, including at the local and central level, exercise broad discretion in deciding how to interpret, apply, and enforce regulations as they deem appropriate, including to promote social order. Regulators in China may change how they interpret and enforce the direct selling regulations, both current interpretations and enforcement thereof or future iterations. Regulators in China may also modify the regulations. We cannot be certain that our business model will continue to be deemed by national or local Chinese regulatory authorities to be compliant with any such regulations. The Chinese government rigorously monitors the direct selling market in China, and in the past has taken serious action against companies that the government believed were engaging in activities they regarded to be in violation of applicable law, including shutting down their businesses and imposing substantial fines. For example, China’s State Administration for Industry and Commerce, Ministry of Education, Ministry of Public Security and Ministry of Human Resources and Social Security carried out a three-month campaign which ended on November 15, 2017 to investigate pyramid selling activities in order to eliminate activities prohibited under relevant regulations. The campaign sought to eliminate organizations that use recruitment to lure and mislead people into participating in pyramid schemes. As a result, there can be no guarantee that the Chinese government’s current or future interpretation and application of the existing and new regulations will not negatively impact our business in China, result in regulatory investigations or lead to fines or penalties against us or our Chinese Members. If our business practices are deemed to be in violation of applicable regulations as they are or may be interpreted or enforced, or modified regulations, in particular with respect to the factors used in determining the services a service provider is eligible to perform and service fees they are eligible to earn and to receive, then we could be sanctioned and/or required to change our business model, either of which could have a significant adverse impact on our business in China.

Chinese regulations prevent persons who are not Chinese nationals from engaging in direct selling in China. We cannot guarantee that any of our Members living outside of China or any of our sales representatives or independent service providers in China have not engaged or will not engage in activities that violate our policies in this market, or that violate Chinese law or other applicable law, and therefore result in regulatory action and adverse publicity.

China has also enacted labor contract and social insurance legislation. We have reviewed our employment contracts and contractual relations with employees in China, which include certain of our employed sales personnel, and have transferred those employed sales personnel to independent service providers and have made such other changes as we believe to be necessary or appropriate to bring these contracts and contractual relations into compliance with these laws and their implementing regulations. In addition, we continue to monitor the situation to determine how these laws and regulations will be implemented in practice. There is no guarantee that these laws will not adversely impact us, cause us to change our operating plan for China or otherwise have an adverse impact on our business operations in China.

We may continue to experience growth in China, and there can be no assurances that we will be able to successfully manage expansion of manufacturing operations and a growing and dynamic sales force. If we are unable to effectively scale our supply chain and manufacturing infrastructure to support future growth in China, our operations in China may be adversely impacted.

If we fail to further penetrate existing markets, then the growth in sales of our products, along with our operating results, could be negatively impacted.

The success of our business is to a large extent contingent on our ability to further penetrate existing markets which is subject to numerous factors, many of which are out of our control. Government regulations in both our domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal, of some of our products, which could negatively impact our business, financial condition and results of operations. Also, our ability to increase market penetration in certain countries may be limited by the finite number of persons in a given country inclined to pursue a direct selling business opportunity or consumers willing to purchase Herbalife products. Moreover, our growth will depend upon improved training and other activities that enhance Member retention in our markets. While we have recently experienced significant growth in certain of our markets, we cannot assure you that such growth levels will continue in the immediate or long term future. Furthermore, our efforts to support growth in such international markets could be hampered to the extent that our infrastructure in such markets is deficient when compared to our infrastructure in our more developed markets, such as the United States. Therefore, we cannot assure you that our general efforts to increase our market penetration and Member retention in existing markets will be successful. If we are unable to further penetrate existing markets, our operating results could suffer.


Our business could be materially and adversely affected as a result of natural disasters, other catastrophic events, acts of war or terrorism, or cyber-security incidents and other acts by third parties.

We depend on the ability of our business to run smoothly, including the ability of Members to engage in their day-to-day selling and business building activities and the ability of our inventories and products to move reasonably unimpeded around the world. Any material disruption caused by natural disasters, including, but not limited to, fires, floods, hurricanes, volcanoes, and earthquakes; power loss or shortages; environmental disasters; telecommunications or business information systems failures; acts of war or terrorism and other similar disruptions, including those due to cyber-security incidents, ransomware, or other actions by third parties, could adversely affect our ability to conduct business. If such disruptions result in significant cancellations of Member orders, contribute to a general decrease in local, regional or global economic activity, directly impact our marketing, manufacturing, financial or logistics functions, or impair our ability to meet Member demands, our operating results and financial condition could be materially adversely affected. For example, our operations in Mexico were impacted by flooding in September 2017. The severe weather conditions directly affected inventory stored at that facility. Furthermore, our headquarters and one of our distribution facilities are located in Southern California, an area susceptible to earthquakes. Although the events in Mexico did not have a material negative impact to our Mexico operations, we cannot assure you that any future natural disasters, catastrophic events, acts of war or terrorism and other similar disruptions, including those due to cyber-security incidents, ransomware, or other actions by third parties, will not adversely affect our ability to operate our business and our financial condition and results of operations.

Our contractual obligation to sell our products only through our Herbalife Member network and to refrain from changing certain aspects of our Marketing Plan may limit our growth.

We are a party to an agreement with our Members that provides assurances, to the extent legally permitted, we will not sell Herbalife products worldwide through any distribution channel other than our network of independent Herbalife Members. Thus, we are contractually prohibited from expanding our business by selling Herbalife products through other distribution channels that may be available to our competitors, such as over the Internet, through wholesale sales, by establishing retail stores or through mail order systems. To the extent legally permitted, an agreement we entered into with our Members provides assurances that we will not sell Herbalife products worldwide through any distribution channel other than our network of independent Herbalife Members. Since this is an open-ended commitment, there can be no assurance that we will be able to take advantage of innovative new distribution channels that are developed in the future.

In addition, this agreement with our Members provides that we will not make any material changes adverse to our Members to certain aspects of our Marketing Plan that may negatively impact our Members without thetheir approval as described in further detail below. For example, our agreement with our Members provides that we may increase, but not decrease, the discount percentages available to our Members for the purchase of products or the applicable royalty override percentages, and production and other bonus percentages available to our Members at various qualification levels within our Member hierarchy. We may not modify the eligibility or qualification criteria for these discounts, royalty overrides and production and other bonuses unless we do so in a manner to make eligibility and/or qualification easier than under the applicable criteria in effect as of the date of the agreement. Our agreement with our Members further provides that we may not vary the criteria for qualification for each Member tier within our Member hierarchy, unless we do so in such a way so as to make qualification easier.

Although we reserved the right to make these changes to our Marketing Plan without the consent of our Members in the event that changes are required by applicable law or are necessary in our reasonable business judgment to account for specific local market or currency conditions to achieve a reasonable profit on operations, we may initiate other changes that are adverse to our Members based on an assessment of what will be best for the Company and its Members. Under the agreement with our Members, these other adverse changes would then
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be submitted to our Member leadership for a vote. The vote would require the approval of at least 51% of our Members then at the level of President’s Team earning at the production bonus level of 6% who vote, provided that at least 50% of those Members entitled to vote do in fact vote. Therefore, whileWhile we believe that this agreement has strengthened our relationship with our existing Members, improved our ability to recruit new Members and generally increased the long-term stability of our business, there can be no assurance that our agreement with our Members will not restrict our ability to adapt our Marketing Plan to the evolving requirements of the markets in which we operate. As a result, our growth may be limited.

Our failure to appropriately respond to changing consumer trends, preferences, and demand for new products and product enhancements could materially harm our Member relationships and our Members’ customer relationships and product sales or otherwise materially harm our business, financial condition, and operating results.
Our business is subject to rapidly changing consumer trends and preferences and product introductions, especially with respect to our nutrition products. Our continued success depends in part on our ability to anticipate and respond to these changes and introductions, and we may not respond or develop new products or product enhancements in a cost-effective, timely, or commercially appropriate manner, or at all, particularly while the
COVID-19
pandemic persists. The success of our new product offerings and enhancements depends on a number of factors, including our ability to:
accurately anticipate consumer needs;
innovate and develop new products and product enhancements that meet these needs;
successfully commercialize new products and product enhancements;
price our products competitively;
manufacture and deliver our products in sufficient volumes and in a cost-effective and timely manner; and
differentiate our product offerings from those of our competitors and successfully respond to other competitive pressures, including technological advancements, evolving industry standards, and changing regulatory requirements.
Our failure to accurately predict changes in consumer demand and technological advancements could negatively impact consumer opinion of our products or our business, which in turn could harm our Member relationships and the Members’ relationships with their customers, and cause the loss of sales. In addition, if we do not introduce new products or make enhancements to meet the changing needs of our Members and their customers in a cost-effective, timely, and commercially appropriate manner, or if our competitors release new products or product enhancements before we do, some of our product offerings could be rendered obsolete, which could cause our market share to decline and negatively impact our business, financial condition, and operating results.
If we fail to further penetrate existing markets, the growth in sales of our products, along with our operating results, could be negatively impacted.
The success of our business is to a large extent contingent on our ability to further penetrate existing markets, which is subject to numerous factors, many of which are out of our control. Our ability to increase market penetration may be limited by the finite number of persons in a given country inclined to pursue a direct-selling business opportunity or consumers aware of, or willing to purchase, Herbalife Nutrition products. Moreover, our growth in existing markets will depend upon increased brand awareness and improved training and other activities that enhance Member retention in our markets. While we have recently experienced significant growth in certain of our foreign markets, we cannot assure you that such growth levels will continue in the immediate or long-term future. Furthermore, our efforts to support growth in such foreign markets could
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be hampered to the extent that our infrastructure in such markets is deficient when compared to our infrastructure in our more developed markets, such as the United States. For example, there can be no assurances that we will be able to successfully manage expansion of manufacturing operations and a growing and dynamic sales force in China. If we are unable to effectively scale our supply chain and manufacturing infrastructure to support future growth in China or other foreign markets, our operations in such markets may be adversely impacted. Therefore, we cannot assure you that our general efforts to increase our market penetration and Member retention in existing markets will be successful. If we are unable to further penetrate existing markets, our business, financial condition, and operating results could materially suffer.
Since one of our products constitutes a significant portion of our net sales, significant decreases in consumer demand for this product or our failure to produce a suitable replacement could materially harm our business, financial condition, and operating results.
Our Formula 1 Healthy Meal, which is our best-selling product line, approximated 28% of our net sales for the year ended December 31, 2020. If consumer demand for this product decreases significantly or we cease offering this product without a suitable replacement, or if the replacement product fails to gain market acceptance, our business, financial condition, and operating results could be materially harmed.
Our business could be materially and adversely affected by natural disasters, other catastrophic events, acts of war or terrorism, cybersecurity incidents, pandemics, and/or other acts by third parties.
We depend on the ability of our business to run smoothly, including the ability of Members to engage in their
day-to-day
selling and business building activities and the ability of our inventories and products to move reasonably unimpeded around the world. Any material disruption caused by unforeseen or catastrophic events, such as (i) natural disasters or severe weather conditions, including fires, floods, hurricanes, volcanic eruptions, and earthquakes; (ii) power loss or shortages; (iii) telecommunications or information technology infrastructure failures; (iv) acts or threats of war, terrorism, or other armed hostilities; (v) outbreaks of contagious diseases, epidemics, and pandemics; (vi) cybersecurity incidents, including intentional or inadvertent exposure of content perceived to be sensitive data; (vii) employee misconduct or error; and/or (viii) other actions by third parties and other similar disruptions, could adversely affect our ability to conduct business and our Members’ selling activities. For example, our operations in Mexico were impacted by flooding in September 2017, when severe weather conditions damaged or otherwise destroyed inventory stored at one of our facilities. Furthermore, our headquarters and one of our distribution facilities and manufacturing facilities are located in Southern California, an area susceptible to fires and earthquakes. Although the events in Mexico did not have a material negative impact on our Mexico operations, we cannot make assurances that any future catastrophic events will not adversely affect our ability to operate our business or our financial condition and operating results. In addition, catastrophic events may result in significant cancellations of Member orders; contribute to a general decrease in local, regional, or global economic activity; directly impact our marketing, manufacturing, financial, or logistics functions; impair our ability to meet Member demands; harm our reputation; and expose us to significant liability, losses, and legal proceedings, any of which could materially and adversely affect our business, financial condition, and operating results.
In March 2020, the World Health Organization declared the
COVID-19
outbreak a global pandemic. The
COVID-19
pandemic has significantly impacted health and economic conditions globally, and has adversely affected the Company’s business and that of its Members in certain of the Company’s markets and may continue to so impact those markets or others in the future. Government, agency, and other regulatory recommendations, guidelines, mandates, and actions to address public health concerns, including restrictions on movement, public gatherings, and travel and restrictions on, or in certain cases outright prohibitions of, companies’ ability to conduct normal business operations, have and may continue to adversely affect our business. Although we have been classified as an essential business in most jurisdictions where we operate, there is no guarantee that this classification will not change. We may also be forced to or voluntarily elect to limit or cease operations in one or more markets for other reasons, such as the health and safety of our employees or because of disruptions in the
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operation of our supply chain and sources of supply. For example, it is possible that closures of our manufacturing facilities could impact our distribution centers and our ability to manufacture and deliver products to our Members. In general, our inventory of products continues to be adequate to meet demand, but we do expect our supply chain and our ability to source and/or manufacture products will be negatively impacted if the negative effects of the pandemic continue for a prolonged period of time or worsen. The pandemic has had an adverse impact on Members’ product access in some markets, which may, and in some cases will, continue until conditions improve. Our Members’ businesses are also subject to many of the same risks and uncertainties related to the
COVID-19
pandemic, as well as other pandemic-related risks and uncertainties that may not directly impact our operations, any of which could adversely affect demand for our products. For example, limitations on public gatherings has restricted our Members’ ability to hold meetings with their existing customers and to attract new customers. Significant limitations on cash transactions could also have an adverse effect on sales of products in certain markets.
The
COVID-19
pandemic is also adversely affecting the economies and financial markets of many countries, causing a significant deceleration of economic activity. This slowdown has reduced production, decreased demand for a broad variety of goods and services, diminished trade levels and led to widespread corporate downsizing, causing a sharp increase in unemployment. We have also seen significant disruption of and extreme volatility in the global capital markets, which could increase the cost of, or entirely restrict access to, capital.
Considerable uncertainty still surrounds the
COVID-19
pandemic, its potential effects and the extent and effectiveness of government responses to the pandemic. If the pandemic is not contained, or if effective vaccines are not made available and utilized quickly enough, the adverse impacts of the
COVID-19
pandemic could worsen, impacting all segments of the global economy, and result in a significant recession or worse. However, the unprecedented and sweeping nature of the
COVID-19
pandemic makes it extremely difficult to predict how our business and operations will be affected in the long run. Accordingly, our ability to conduct our business in the manner previously done or planned for the future could be materially and adversely affected, and any of the foregoing risks, or other cascading effects of the
COVID-19
pandemic that are not currently foreseeable, could materially and adversely affect our business, financial condition, and operating results. See the
COVID-19
Pandemic
and
Sales by Geographic Region
sections in Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, of this Annual Report on
Form 10-K
for further discussion of the impacts of the
COVID-19
pandemic on our business and operating results.
We depend on the integrity and reliability of our information technology infrastructure, and any related interruptions or inadequacies may result in substantial interruptions tohave a material adverse effect on our business.

business, financial condition, and operating results.

Our business, including our ability to provide products and services to and manage our Members, depends on the performance and availability of our information technology infrastructure, including our core transactional systems. We operateThe most important aspect of our global back office transactional systems on an Oracle Enterprise Suite whichinformation technology infrastructure is supported by a robust hardware and network infrastructure. The Oracle Enterprise Suite is a scalable and stable solution that provides a solid foundation uponthe system through which we are buildingrecord and track Member sales, Volume Points, royalty overrides, bonuses, and other incentives. The failure of our next generation Member facing Internet toolset.information systems to operate effectively, or a breach in security of these systems, could adversely impact the promptness and accuracy of our product distribution and transaction processing. While we continue to invest in our information technology infrastructure, there can be no assurance that there will not be any significant interruptions to such systems or that the systems will be adequate to meet all of our future business needs.

Our information technology infrastructure, as well as that of our Members and the other third parties with which we interact, may be damaged, disrupted, or breached or otherwise fail for a number of reasons, including power outages, computer and telecommunication failures, internal design, manual or usage errors, workplace violence or wrongdoing, or catastrophic events such as natural disasters, severe weather conditions, or acts of war or terrorism. In addition, numerous and evolving cybersecurity threats, including advanced and persistent cyberattacks, such as unauthorized attempts to access, disable, improperly modify, exfiltrate, or degrade our information technology infrastructure, or the introduction of computer viruses, malware, “phishing” emails, and

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other destructive software, and social engineering schemes, could compromise the confidentiality, availability, and integrity of our information technology infrastructure isas well as those of the system throughthird parties with which we record and track Member sales, Volume Points, royalty overrides, bonuses and other incentives.interact. These attacks may come from external sources, such as governments or hackers, or may originate internally from an employee or a third party with which we interact. We have encountered,been the target of, and may encounterbe the target of in the future, errors in our software or our enterprise network, or inadequacies in the software and services supplied by our vendors,malicious cyber-attacks, although to date none of these errors or inadequacies hasattacks have had a meaningful adverse impact on our business. business, financial condition, or operating results. Additionally, in response to the
COVID-19
pandemic, many of our employees have been encouraged to work remotely, which may increase our exposure to significant systems interruptions, cybersecurity attacks, and otherwise compromise the integrity and reliability of our information technology infrastructure and our internal controls.
Any such errorsdisruptions to, or failures or inadequacies of, our information technology infrastructure that we may encounter in the future may result in substantial interruptions to our servicesoperations, expose us to significant liability, and may damage our reputation and our relationships with, or cause us to lose, our Members, especially if the errorsdisruptions, failures, or inadequacies impair our ability to track sales and pay royalty overrides, bonuses, and other incentives, any of which would harm our business, financial condition and operating results. Any such errorsdisruptions, failures, or inadequacies could also create compliance risks under the Consent Order and result in penalties, fines, or sanctions under any applicable laws or regulations. Such errorsFurthermore, it may be expensive or difficult to correct or replace any aspect of our information technology infrastructure in a timely manner, if at all, and we may have little or no control over whether any inadequacies in software ormalfunctioning information technology services supplied to us by third parties are appropriately corrected, if at all.

Our ability to effectively manage our network of Members, We have encountered, and to ship products, and track royalty and bonus payments on a timely basis, depends significantly on our information systems. The failure of our information systems to operate effectively, or a breachmay encounter in security of these systems, could adversely impact the promptness and accuracy of our product distribution and transaction processing. We could be required to make significant additional expenditures to remediate any such failure, problem or breach.

Anyone who is able to circumvent our security measures could misappropriate confidential or proprietary information, including that of third parties such as our Members, cause interruptionfuture, errors in our operations, damage our computers or otherwise damage our reputation and business. We may need to expend significant resources to protect against security breaches or to address problems caused by such breaches. Any actual security breaches could damage our reputation and result in a violation of applicable privacy and other laws, legal and financial exposure, including litigation and other potential liability, and a loss of confidence in our security measures, which could have an adverse effect on our results of operationssoftware and our reputation as a brand, business partner or employer. In addition, employee error or malfeasance or other errorsenterprise network, and inadequacies in the storage, use or transmission of any such information could result in a disclosure to third parties. If this should occur we could incur significant expenses addressing such problems. Since we collectsoftware and store Member and vendor information, including credit card information, these risks are heightened.

In addition, the use and handling of this information is regulatedservices supplied by evolving and increasingly demanding laws and regulations, such as the European Union General Data Protection Regulation, or the GDPR, which will take effect in May 2018. These laws and regulations are increasing in complexity and number, change frequently and increasingly conflict among the various countries in which we operate, which has resulted in greater compliance risk and cost for us. If we fail to comply with these laws or regulations, we could be subject to significant litigation, monetary damages, regulatory enforcement actions or fines in one or more jurisdictions, which could have a material adverse effect on our results of operations.

Since we rely on independent third parties for the manufacture and supply of certain of our products, ifvendors, although to date none of these third partieserrors or inadequacies have had a meaningful adverse impact on our business, financial condition or operating results.

If any of our manufacturing facilities or third-party manufacturers fail to reliably supply products to us at required levels of quality and which are manufactured in complianceor fail to comply with applicable laws, including the dietary supplement and OTC drug cGMPs, then our financial condition and operating results wouldcould be harmed.

Amaterially and adversely impacted.

Any significant portioninterruption of production at any of our products are manufactured by third party contract manufacturers. We cannot assure you that our outsidemanufacturing facilities or third-party contract manufacturers will continue to reliably supply products to us at the levels of quality,may materially harm our business, financial condition, and operating results. For example, natural disasters, including earthquakes, fires, hurricanes, or the quantities, we require, andfloods, technical issues, work stoppages, or other unforeseen or catastrophic events, that result in compliance with applicable laws, including under the FDA’s cGMP regulations. Additionally, while we are not presently aware of any current liquidity issues with our suppliers, we cannot assure you that they will not experience financial hardship.

For the portion of our product supply that is self-manufactured, we believe we have significantly lowered the product supply risk, as the risk factors of financial health, liquidity, capacity expansion, reliability and product quality are all within our control. However, increases to the volume of products that we self-manufacture in our Winston-Salem, Lake Forest, Nanjing, Suzhou, and Changsha facilities raise the concentration risk that a significant interruption of production at any of our facilities due to, for example, natural disasters including earthquakes, hurricanes and floods, technical issues or work stoppagesthird-party contract manufacturers could impede our ability to conduct business. While ourwe have business continuity programs for our manufacturing facilities which contemplate and plan for such events, if we were to experience such an event resulting in the temporary, partial, or complete shutdown of one of these manufacturing facilities, we could be required to transfer manufacturing to thea surviving facility and/or third-party contract manufacturers if permissible. When permissible, converting or transferring manufacturing to a third-party contract manufacturer could be expensive and time-consuming, result in delays in our production or shipping, reduce our net sales, damage our relationship with Members, and damage our reputation, in the marketplace, any of which could harm our business, resultsfinancial condition, and operating results. Additionally, we cannot assure you that our third-party contract manufacturers will continue to reliably supply products to us at the levels of operationsquality, or the quantities, we require, and financial condition.


in compliance with applicable laws, including the FDA’s CGMP regulations. Our product supply contracts generally have a three-year term.terms. Except for force majeure events, such as natural disasters and other acts of God, and

non-performance
by Herbalife Nutrition, our contract manufacturers generally cannot unilaterally terminate these contracts. These contracts can generally be extended by us at the end of the relevant time periodtime-period and we have exercised this right in the past. Globally, we have over 50 product suppliers,contract manufacturers, with Fine Foods (Italy) being a major supplier for meal replacements, protein powders and nutritional supplements. Additionally, we useOur contract manufacturers are also located in the United States, India, Brazil, South Korea, Japan, Taiwan, Germany, and the Netherlands to support our global business. In the eventNetherlands. If any of our contract manufacturers were to become unable or unwilling to continue to provide us with products in required volumes and at suitable quality levels, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be able to obtain acceptable alternative manufacturing sources on a cost-effective or timely basis.basis, or at all. An extended interruption in the supply of our products, including any interruptions that may arise as a result of the
COVID-19
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pandemic, would result in the loss of sales.sales, which could have a material adverse effect on our business, financial condition, or operating results. In addition, any actual or perceived degradation of product quality as a result of reliance on contract manufacturers may have an adverse effect on sales or result in increased product returns and buybacks.

As a result of the
COVID-19
pandemic, we and our contract manufacturers have experienced some delays in receiving and delivering certain ingredients and packaging components. While these delays have not materially impacted our supply levels, there is no guarantee that there will be sufficient global supply for us or our contract manufacturers to manufacture our products at sufficient levels to meet demand or at the
pre-pandemic
levels. We are actively monitoring the pandemic and its potential impact on our supply chain and operations. Given the uncertainties surrounding
COVID-19,
including the severity of the disease, the duration and extent of the outbreak, and actions taken or to be taken by governmental authorities and the resulting impacts from those responses to our third-party contract manufacturers, we cannot guarantee that we will have a sufficient and reliable supply of ingredients from our third-party vendors or products from our contract manufacturers. Additionally, while we are not presently aware of any current liquidity issues with our suppliers or contract manufacturers, we cannot assure you that they will not experience financial hardship as a result of the
COVID-19
pandemic or otherwise, which could impact their ability to meet our needs.
If we lose the services of members of our senior management team, our business, financial condition, and operating results could be materially harmed.
We depend on the continued services of our senior management team as it works closely with the senior Member leadership to create an environment of inspiration, motivation, and entrepreneurial business success. Although we have entered into employment agreements with certain members of our senior management team, and do not believe that any of them are planning to leave or retire in the near term, we cannot assure you that all members of our senior management team will remain with us. The loss or departure of any member of our senior management team could adversely impact our Member relations and operating results. Also, the loss of key personnel, including our regional and country managers, could negatively impact our ability to implement our business strategy, and our continued success will also be dependent on our ability to retain existing, and attract additional, qualified personnel to meet our needs. Further, to the extent we are required to replace members of senior management or key personnel, any significant leadership change or transition involves inherent risk and any failure to ensure a smooth transition could hinder our strategic planning and execution, adversely impact our Member relations, or cause our business to suffer. While we strive to mitigate any negative impact associated with changes to our senior management team or key personnel, there may be uncertainty among investors, employees, Members, and others concerning our future direction and performance. Any disruption in our operations or uncertainty could have a material adverse effect on our business, financial condition, and operating results. We currently do not maintain “key person” life insurance with respect to our senior management team.
Our share price may be adversely affected by third parties who raise allegations about our Company.
Short sellers and others who raise allegations regarding our business activities, some of whom are positioned to profit if our share price declines, can negatively affect our share price. For example, in late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program, our product safety, our accounting practices, and other matters, and announced that his fund had taken a significant short position regarding our common shares, leading to intense public scrutiny and significant share price volatility. Following this public announcement, our share price dropped significantly. Additionally, from time to time we are subject to various legal proceedings, including governmental and regulatory inquiries and inquiries from legislators, that may adversely affect our share price. Significant volatility of our share price may cause the value of a shareholder’s investment to decline rapidly.
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Risks Related to Regulatory and Legal Matters
Our products are affected by extensive regulations and our failure or our Members’ failure to comply with any regulations could lead to significant penalties or claims, which could materially harm our financial condition and operating results.
The majority of our products are classified as foods, dietary supplements, and cosmetics. In both domestic and foreign markets, the formulation, manufacturing, packaging, labeling, distribution, advertising, importation, exportation, licensing, sale, and storage of our products are subject to extensive government regulation. This regulation takes the form of laws, governmental regulations, administrative determinations, court decisions, and other similar constraints and exists at the federal, state, and local levels in the United States and at all levels of government in foreign jurisdictions. There can be no assurance that we or our Members are, or will remain, in compliance with all of these regulations. Our failure or our Members’ failure to comply with applicable regulations could disrupt the manufacturing of our products, our marketing activity, our Members’ sale of our products, or lead to increased costs, legal or regulatory proceedings, the imposition of significant penalties, or harm our reputation, any of which could adversely impact our business, financial condition, and operating results. In addition, regulatory authorities periodically review legislative and regulatory policies and initiatives, and may promulgate new or revised, or adopt changes in the interpretation and enforcement of existing, regulations at any time. The adoption of new regulations or changes in the interpretations of existing regulations, such as those relating to genetically modified foods, may result in significant compliance costs or discontinuation of impacted product sales and may negatively impact the marketing of our products or require us to change or cease aspects of our business, any of which could result in significant loss of sales and harm our business, financial condition, and operating results.
For example, we are subject to the rules of the FDA, including for CGMPs. Any failure by us or our contract manufacturers to comply with the CGMPs could negatively impact our reputation and ability to sell our products even after the situation has been rectified and, in the case of our contract manufacturers, even though we are not directly liable under the CGMPs for their compliance. In complying with the dietary supplement CGMPs, we have experienced increases in production costs due to increases in required testing of raw ingredients, work in process, and finished products. In addition, regulators and other governmental authorities limit the types of claims that we and our Members can make about our products, including nutrition content claims, health claims, and therapeutic claims and otherwise regulate the marketing of our products. For example, the FTC’s Guides explain how the FTC interprets prohibitions on unfair or deceptive acts or practices. Consequently, the FTC could bring an enforcement action based on practices that are inconsistent with the Guides. The Consent Order entered into with the FTC in 2016 also includes restrictions regarding the marketing of our products. It is possible that our use, and that of our Members, of marketing materials, including testimonials about our products, may be significantly impacted by laws, rules, and regulations governing the marketing of our products and therefore might negatively impact our sales.
From time to time, we receive inquiries from regulators and third parties requesting information concerning our products. We fully cooperate with these inquiries including, when requested, by the submission of detailed technical documents addressing product composition, manufacturing, process control, quality assurance, and contaminant testing. We are confident in the safety of our products when used as directed. However, there can be no assurance that regulators, including in countries where we plan to commence or expand operations, will not take actions that may adversely affect our business and our sales, including preventing or delaying entry into markets or the introduction of new products or requiring the reformulation or the temporary or permanent withdrawal of certain of our existing products from their markets. Any such regulatory action, regardless of whether it results in a final determination adverse to us, could create negative publicity, with detrimental effects on the motivation and recruitment of Members and, consequently, on sales. For example, the Chinese government carried out a
100-day
review, or the Review, in 2019 to investigate the unlawful promotion and sales of health products, which resulted in negative media attention to the health products industry and materially and adversely impacted our business in China in 2019 as Members significantly reduced activities and sales meetings
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during and following the Review. Additionally, in response to the
COVID-19
pandemic, the FTC has increased its scrutiny of claims being made by companies and issued hundreds of warning letters to, and initiated enforcement actions against, companies making health claims related to the ability of their products to treat, cure, or prevent
COVID-19
or business opportunity claims related to
COVID-19.
Our network marketing program is subject to extensive regulation and scrutiny and any failure to comply, or alteration to our compensation practices in order to comply, with these regulations could materially harm our business, financial condition, and operating results.
Our network marketing program, like the compensation practices of other direct-selling organizations, is subject to a number of federal, state, and foreign regulations administered by the FTC and other federal, state, and foreign agencies. Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, sometimes referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on genuine demands and sales of the organization’s products rather than investments in the organization or other
non-retail
sales-related criteria. For example, in certain foreign countries, compensation to distributors in the direct-selling industry may be limited to a certain percentage of sales.
The regulatory requirements concerning network marketing programs do not include “bright line” rules and are inherently fact-based and, thus, we are subject to the risk that these regulations or the enforcement or interpretation of these regulations by regulators or courts can change. Regulatory authorities also periodically review legislative and regulatory policies and initiatives and may promulgate new or revised regulations. For example, in 2018, the FTC released its nonbinding Business Guidance Concerning Multi-Level Marketing. The adoption of new regulations, or changes in the interpretations or enforcement of existing regulations, may result in significant compliance costs or require us to change or cease aspects of our network marketing program. In addition, the ambiguity surrounding these regulations can also affect the public perception of the Company and our business model. For example, in the past, allegations regarding the legality of our network marketing program have been raised, which led to intense public scrutiny and significant share price volatility.
From time to time, we are a party to various regulatory proceedings related to compliance with regulations applicable to our network marketing program. We are also subject to the risk of private party challenges to the legality of our network marketing program, and similar programs of other companies have been successfully challenged in the past. Legal proceedings may cause us to incur significant expenses, including legal fees and costs for remediation efforts, and result in fines, penalties, sanctions, adverse judgments, or negative publicity, any of which could materially harm our business, financial condition, and operating results and impact our share price. For example, in one or more markets, our network marketing program could be found not to be in compliance, or a court could issue an adverse determination with respect to our network marketing program specifically or with respect to network marketing practices generally in proceedings not involving us, any of which may require us to alter our compensation practices under our network marketing program and adversely impact our ability to recruit and maintain Members or to obtain or maintain a license, permit, or similar certification. As previously disclosed, the Consent Order entered into with the FTC in 2016 and the 1986 permanent injunction entered in California required us to make changes to our network marketing program and our business operations. There can be no assurances that federal, state, or foreign regulators or courts will not require similar actions in the future. While we believe we are in compliance with regulations applicable to our network marketing program, including those enforced by the Consent Order and the permanent injunction in California, there is no assurance that any federal, state, or foreign courts or regulators or the independent compliance auditor under the Consent Order would agree. The failure of our network marketing program to comply with current or newly adopted laws, rules, and regulations, the Consent Order, or the California injunction, or any allegations or charges to that effect brought by federal, state, or foreign regulators, could have a material adverse impact our business in a particular market or in general and may adversely affect our share price.
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We are subject to the Consent Order with the FTC, the effects of which, or any failure to comply therewith, could materially harm our business, financial condition, and operating results.
As previously disclosed, in July 2016, we entered into the Consent Order with the FTC. As part of the Consent Order, we agreed to make a payment of $200 million and to implement, and continue to enhance, certain procedures in the United States. We also agreed, among other things, to (i) be subject to certain audits by an independent compliance auditor, or the ICA, for a period of seven years; (ii) requirements regarding compliance certification and record creation and maintenance; (iii) a prohibition on misrepresentations and misleading claims made by us or our Members regarding the income potential of participants in our network marketing program and misleading depictions of lavish lifestyles; and (iv) restrictions on distributors’ ability to open Nutrition Clubs in the United States. The FTC and ICA have the right to inspect Company records and request additional compliance reports for purposes of conducting audits pursuant to the Consent Order. The terms of the Consent Order are described in greater detail in our Current Report on
Form 8-K
filed on July 15, 2016.
The Consent Order, including our compliance therewith and the procedures implemented as a result thereof, has impacted, and may continue to impact, our business operations, including our net sales and profitability. For example, the Consent Order includes a number of restrictions and requirements, including regarding the verification and receipting of sales, and therefore creates compliance risks and costs. As a result, we have implemented a number of enhanced procedures regarding, among other things, tracking retail sales and internal consumption by distributors. We have also instituted controls and procedures and developed technology solutions that we believe address our Consent Order requirements, including tools and software used by distributors to document their sales and more efficiently track and manage their customer base. However, there can be no assurances that some or all of these controls and procedures and technology solutions will continue to operate as expected. These controls and procedures and technology solutions have been, and may continue to be, costly. These extensive costs or any amounts in excess of our cost estimates could have a material adverse effect on our financial condition and operating results. In addition, any failure of these systems to operate as designed could cause us to fail to maintain the records required under, or otherwise violate terms of, the Consent Order.
Further, management and our board of directors have been, and may continue to be, required to focus a substantial amount of time on Consent Order compliance activities, which could divert their attention from running and growing our business. At any time, we may also be required to suspend or defer many or all of our current or anticipated business development, capital deployment and other projects unrelated to compliance with the Consent Order to allow resources to be focused on our compliance efforts, which could cause us to fall short of any guidance or analyst or investor expectations. In addition, while we believe the Consent Order has set new standards within the direct-selling industry, our competitors are not required to comply with the Consent Order and may not be subject to similar actions, which could limit our ability to effectively compete for Members, customers, and ultimately sales.
A number of our Members disagreed with our decision to enter into the Consent Order, whether because they disagreed with certain terms thereof, they believed it would negatively impact their personal business, or they would not have settled the investigation on any terms. Compliance with the Consent Order, however, requires the cooperation of our Members and, while we have updated our training programs and policies to address the Consent Order and expect our Members to cooperate, we do not have the same level of influence or control over our Members as we would if they were our employees. Failure by our Members to comply with the relevant aspects of the Consent Order could be a violation of the Consent Order and impact our ability to comply. In addition, the Consent Order provides that if the total eligible U.S. sales on which compensation may be paid falls below 80% of the Company’s total U.S. sales for a given year, compensation payable to distributors on eligible U.S. sales will be capped at 41.75% of the Net Rewardable Sales amount as defined in the Consent Order. Because our business is dependent on our Members, our business operations and net sales could be adversely affected if U.S. distributor compensation is restricted or if any meaningful number of Members are dissatisfied, choose to reduce activity levels, or leave our business altogether. Member dissatisfaction may also negatively impact the willingness of new Members to join Herbalife Nutrition as a distributor.
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The Consent Order also creates additional third-party risks. The Consent Order does not prevent other third parties from bringing actions against us, whether in the form of other federal, state, or foreign regulatory proceedings or private litigation, any of which could lead to monetary settlements, fines, penalties, or injunctions. Although we neither admitted nor denied the allegations in the FTC’s complaint (except as to the Court having jurisdiction over the matter), third parties may use specific statements or other matters addressed in the Consent Order as the basis for their action. The Consent Order has caused, and any subsequent legal or regulatory claim may also lead to, negative publicity, whether because some view it as a condemnation of the Company or our direct-selling business model or because other third parties use it as justification to make unfounded and baseless assertions against us, our business model, or our Members. An increase in the number, severity or scope of third-party claims, actions or public assertions may result in substantial costs and harm to our reputation. The Consent Order may also impact third parties’ willingness to work with us as a company.
We believe we have complied with the Consent Order and we will continue to do so. However, the FTC or ICA may not agree now or in the future. In the event we are found to be in violation of the Consent Order, the FTC could take corrective actions such as initiating enforcement actions, seeking an injunction or other restrictive orders and imposing civil monetary penalties against us and our officers and directors. Further, the impact of the Consent Order on our business, including the effectiveness of the controls, procedures, and technology solutions implemented to comply therewith, and on our Member base could be significant. If our business or Member base is adversely impacted, it is uncertain as to whether, or how quickly, we would be able to restructure or rebuild, irrespective of market conditions. Our financial condition and operating results could be materially harmed if we fail to comply with the Consent Order, if costs related to compliance exceed our estimates, if it has a negative impact on net sales, or if it leads to further legal, regulatory, or compliance claims, proceedings, or investigations or litigation.
Our actual or perceived failure to comply with privacy and data protection laws, rules, and regulations could materially harm our business, financial condition, and operating results.
Our business requires the collection, transmission, and retention of large volumes of confidential and proprietary information, including personally identifiable information of our Members, customers, leads, vendors, and employees in various information technology systems that we maintain and in those maintained by third parties with which we interact. Anyone who is able to circumvent our security measures or those of our third-party service providers could misappropriate such confidential or proprietary information, including that of third parties such as our Members, cause interruption in our operations, damage our information technology infrastructure or otherwise damage our business. We may need to expend significant resources to protect against security breaches or to address problems caused by such breaches. Any actual security breaches could result in legal and financial exposure, including litigation and other potential liability, and a loss of confidence in our security measures, which could have a material adverse effect on our business, financial condition, and operating results and our reputation as a brand, business partner, and employer. In addition, employee error or malfeasance or other errors in the storage, use, or transmission of any such information could result in disclosure to third parties. If this should occur, we could incur significant expenses addressing such problems. Since we collect and store Member, customer, and vendor information, including credit card banking information, these risks are heightened. In addition, our role as a credit card merchant may also put us at a greater risk of being targeted by hackers and requires us to comply with certain regulatory requirements. See also the risk factor titled “
We depend on the integrity and reliability of our information technology infrastructure, and any related interruptions or inadequacies may have a material adverse effect on our business, financial condition, and operating results.
In addition, the use and handling of certain types of information, including personally identifiable and financial information, is regulated by evolving and increasingly demanding laws, rules, and regulations, such as the European Union General Data Protection Regulation, which became effective in May 2018, the Brazil Law on General Data Protection, which became effective in September 2020, the California Consumer Privacy Act, or the CCPA, which became effective in January 2020, and the European Union Payment Services Directive 2, which became effective in January 2021 and requires stronger customer authentication for online transactions in
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that region. These laws impose continuing, and at times new, responsibilities on our operations, including, among other things, the collection, deletion, disclosure, and maintenance of personally identifiable and financial information of our customers and Members and could present technological challenges and negatively impact our sales. These privacy and data security laws, rules, and regulations are increasing in their complexity, enactment, and amendments. As such, compliance with these laws, rules, and regulations and potential and actual conflicts amongst them in the various jurisdictions in which we operate have resulted in greater compliance risk and cost for us. If we fail to comply with these privacy and data security laws, rules, and regulations, we could be subject to significant litigation, monetary damages, and regulatory enforcement actions or fines in one or more jurisdictions, which could have a material adverse effect on our operating results.
We are subject to material product liability risks, which could increase our costs and materially harm our business, financial condition, and operating results.
Our ingestible products include vitamins, minerals, botanicals, and other ingredients and are classified as foods or dietary supplements and are not subject to
pre-market
regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain ingredients that do not have long histories of human consumption or use. Although we rely upon published and unpublished safety information, including clinical studies on ingredients used in our products, and conduct limited clinical studies on some key products, unknown adverse reactions resulting from human consumption or use of these ingredients could occur. We have been, and may again be, subjected to various product liability claims, including claims that the products contain contaminants, include inadequate instructions as to their uses, and include inadequate warnings concerning side effects and interactions with other substances. It is possible that widespread product liability claims could increase our costs and materially adversely affect our business, financial condition, and operating results. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees. Moreover, product liability claims may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may not cover all product liability claims, which may require us to pay substantial monetary damages. Finally, even if our insurance covers a claim, given the level of self-insured retentions that we have accepted under our current product liability insurance policies, which is $12.5 million, in certain cases we may be subject to the full amount of liability associated with any claims, which could be substantial.
If we fail to protect our trademarks and tradenames, thenintellectual property, our ability to compete could be negatively affected, which wouldcould materially harm our financial condition and operating results.

The

Our success and the market for our products dependsdepend to a significant extent upon the goodwill associated with our trademark and tradenames.tradenames and our ability to protect our proprietary rights in our innovative products and product enhancements. We own, or have licenses to use, the material trademark and trade name rights used in connection with the packaging, marketing, and distribution of our products in the markets where those products are sold. Therefore, trademark and trade name protection is important to our business. Although most of our trademarks are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection or obtaining new trademark registrations. We permit the limited use of our trademarks by our Members to assist them in marketing our products. It is possible that doing so may increase the risk of unauthorized use or misuse of our trademarks in markets where their registration status differs from that asserted by our Members, or they may be used in association with claims or products in a manner not permitted under applicable laws, rules, and regulations. Were these to occur, it is possible that this could diminish the value of these marks or otherwise impair our further use of these marks.
We attempt to protect our innovative products and product enhancements under a combination of copyright, trademark, and trade secret laws, confidentiality procedures, and contractual provisions. However, our products are generally not patented domestically or abroad, and the legal protections afforded by common law and contractual proprietary rights in our products provide only limited protection. In addition,
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Monitoring infringement or misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect every infringement or misappropriation of our proprietary rights or to prevent third parties from infringing upon or misappropriating our proprietary rights or from independently developing
non-infringing
products that are competitive with, equivalent to, or superior to our products. Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations and may result in the impairment or loss of all or portions of our proprietary rights. Further, the laws of certainsome foreign countries maydo not protect our intellectual property rights to the same extent as do the laws of the United States. The loss or infringement of our trademarks or tradenames could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.

Unlike in most of the other markets in which we operate,For example, there is limited protection of intellectual property is available under Chinese law. Accordingly, we face an increased risk in China that unauthorized parties may attempt to copy or otherwise obtain or use our trademarks, copyrights, product formulations or other intellectual property. Further, because Chinese commercial law is relatively undeveloped, we may have limited legal recourse in the event we encounter significant difficulties with intellectual property theft or infringement. As a result, we cannot assure you that we will be able to adequately protect our product formulationsintellectual property in any jurisdictions. The loss or other intellectual property.

We permit the limited useinfringement of our trademarks byor tradenames or other proprietary rights could impair the goodwill associated with our Members to assist them in marketingbrands and harm our products. It is possible that doing so may increase the risk of unauthorized use or misuse ofreputation, which could materially harm our trademarks in markets where their registration status differs from that asserted by our Members, or they may be used in association with claims or products in a manner not permitted under applicable laws and regulations. Were these to occur it is possible that this could diminish the value of these marks or otherwise impair our further use of these marks.

If our Members fail to comply with labeling laws, then ourbusiness, financial condition, and operating results would be harmed.

Although the physical labeling of our products is not within the control of our Members, our Members must nevertheless advertise our products in compliance with the extensive regulations that exist in certain jurisdictions, such as the United States, which considers product advertising to be labeling for regulatory purposes.

Our products are sold principally as foods, dietary supplements and cosmetics and are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made for our products. The treatment or cure of disease, for example, is not a permitted claim for these products. While we train our Members and attempt to monitor our Members’ marketing materials, we cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. results.

If our Members fail to comply with these restrictions, then we and our Members could be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which could harm our financial condition and operating results. Although we expect that our responsibility for the actions of our Members in such an instance would be dependent on a determination that we either controlled or condoned a noncompliant advertising practice, there can be no assurance that we could not be held vicariously liable for the actions of our Members.


If our intellectual property is not adequate to provide us with a competitive advantage or to prevent competitors from replicating our products, or if we infringe the intellectual property rights of others, then our business, financial condition, and operating results wouldcould be materially harmed.

Our future success and ability to compete depend upon our ability to timely produce innovative products and product enhancements that motivate our Members and customers, which we attempt to protect under a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions. However, our products are generally not patented domestically or abroad, and the legal protections afforded by common law and contractual proprietary rights in our products provide only limited protection and may be time-consuming and expensive to enforce or maintain. Further, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our proprietary rights or from independently developing non-infringing products that are competitive with, equivalent to or superior to our products.

Monitoring infringement or misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect every infringement or misappropriation of our proprietary rights. Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations. Further, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.

Additionally, third

Third parties may claim that products or marks that we have independently developed or which bear certain of our trademarks infringe upon their intellectual property rights and there can be no assurance that one or more of our products or marks will not be found to infringe upon third partythird-party intellectual property rights in the future.

Since one of our products constitutes a significant portion of our net sales, significant decreases in consumer demand for this product or our failurefuture and we may need to produce a suitable replacement should we cease offering it would harm our financial condition and operating results.

For 2017, 2016, and 2015, our Formula 1 Healthy Meal, our best-selling product line, approximated 30% of our net sales. If consumer demand for this product decreases significantlysettle disputes on terms that are unfavorable to us, or we cease offering this product without a suitable replacement, then our financial condition and operating results would be harmed.

If we lose the services of members of our senior management team, then our financial condition and operating results could be harmed.

We depend on the continued services of our Executive Chairman, Michael O. Johnson, our Chief Executive Officer, Richard P. Goudis, and our senior management team as it works closely with the senior Member leadership to create an environment of inspiration, motivation and entrepreneurial business success. Any significant leadership change or senior management transition involves inherent risk and any failure to ensure a smooth transition could hinder our strategic planning, execution and future performance. While we strive to mitigate the negative impact associated with changes to our senior management team, there may be uncertainty among investors, employees, Memberssubject to an unfavorable judgment. Defending these and others concerning our future directionother intellectual property infringement claims can be time-consuming and performance.costly and require the attention of management. The terms of any settlement or judgment may require us to pay substantial amounts to the other party or cease, or seek a license to continue, using products or marks found to be in violation of third-party intellectual property rights. A license may not be available on reasonable terms, or at all, and we may be required to develop alternative

non-infringing
products or marks or discontinue use of such products or marks. Any disruption in our operations or uncertaintydevelopment efforts could require significant effort and expense. Any of the foregoing could have a material adverse effect on our business, financial condition, and operating results.
We may be held responsible for additional compensation, certain taxes, or results of operations.

Additionally, although we have entered into employment agreements with certain membersassessments relating to the activities of our senior management team,Members, which could materially harm our financial condition and do not believe thatoperating results.

Our Members are subject to certain taxation, and in some instances, we are required to collect taxes from our Members, such as value-added tax, or VAT, and social contributions, and to maintain appropriate records. In addition, if local laws, rules, and regulations or their interpretation change to require us to treat our Members as employees, or if our Members are deemed by regulatory authorities to be our employees rather than independent contractors, in any of them are planning to leavesuch jurisdictions we may be held responsible for additional compensation, social security or retire in the near term, we cannot assure you thatsimilar contributions, withholding, and related taxes, and workers’ compensation insurance, plus any related assessments and penalties, which could materially harm our senior managers will remain with us. The loss or departure of any member of our senior management team could adversely impact our Member relationsfinancial condition and operating results. IfOur Members could face similar risks with respect to other Members in their sales organizations who may claim they are employees of that Member rather than independent contractors or independent business owners, which could impact their sales operations or lead them to cease their participation in our network marketing program. For example, California passed legislation, taking effect January 1, 2020, which seeks to expand the classification of employees. Other states may propose similar legislation or interpret existing laws, rules, and regulations to expand the classification of employees. Although the California legislation provides an exemption for direct sellers, there can be no assurance that other jurisdictions will provide such an exemption or that judicial or regulatory authorities will not assert interpretations that would mandate that we change our classification. See Note 7,
Contingencies
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial
Statement Schedules
, of this Annual Report on
Form 10-K
for a more specific discussion of contingencies related to the activities of our Members.
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Risks Related to Our International Operations
A substantial portion of our business is conducted in foreign jurisdictions, exposing us to the risks associated with international operations.
Approximately 76% of our net sales for the year ended December 31, 2020 were generated outside the United States, exposing our business to risks associated with international operations. We have invested significant resources in our international operations and expect to continue to do so in the future. However, there are certain risks inherent in doing business in international markets, particularly in the direct-selling industry, which is regulated in many jurisdictions.
For example, a foreign government may impose trade restrictions or increased tariffs, require compliance with trade and economic sanctions laws, rules, or regulations, such as those administered by U.S. Customs and Border Protection and the U.S. Treasury Department’s Office of Foreign Assets Control, implement new or change existing trade policies, or otherwise limit or restrict our ability to import products in a cost-effective manner, or at all, any of these executives do not remain with us, our business could suffer. Also, the loss of key personnel, including our regional and country managers,which could negatively impact our ability to implementoperations. Additionally, we may be negatively impacted by conflicts with or disruptions caused or faced by our business strategy,third-party importers, as well as conflicts between such importers and our continued success willlocal governments or regulators.
Our operations in some jurisdictions also may be dependent on our ability to retain existing,adversely affected by political, economic, legal, regulatory, and attract additional, qualified personnel to meet our needs. We currently do not maintain “key person” life insurance with respectsocial conditions, or instability, as well as by economic and political tensions between governments. For example, tariffs enacted by the United States and other foreign governments, such as China or Mexico, that apply to our senior management team.

products or our ingredients may have an adverse impact on the costs and future sales of our products, particularly if we deem it necessary to increase product prices. In addition, our compliance with anti-bribery laws, rules, and regulations may conflict with local customs and practices in certain of the jurisdictions in which we operate. See the risk factor titled “

Our international operations

We are subject to the anti-bribery, laws, rules, and regulations of the United States and manythe other foreign countries, includingjurisdictions in which we operate.
Our ability to staff and manage our international operations could also be affected by laws and regulations related to immigration. For example, current and future tightening of U.S. immigration controls may adversely affect the residence status of
non-U.S.
employees in our U.S. locations or our ability to hire new
non-U.S.
employees in such locations and may adversely affect the ability of
non-U.S.
Members from entering the United States.
We are also exposed to risks associated with foreign currency fluctuations, foreign exchange controls, limitations on the repatriation of funds, and changes in currency policies or practices. For instance, purchases from suppliers are generally made in U.S. dollars while sales to Members are generally made in local currencies. Accordingly, any strengthening of the U.S. Foreign Corrupt Practices Act,dollar versus a foreign currency could have a negative impact on us. Although we engage in transactions to protect against risks associated with foreign currency fluctuations, we cannot be certain any hedging activity will effectively reduce our exchange rate exposure. In addition, due to the U.K. Bribery Act,possibility of government restrictions on transfers of cash out of a country and control of exchange rates, we may not be able to immediately repatriate cash at the official exchange rate. If this should occur, or if the official exchange rate devalues, it may have a material adverse effect on our business, assets, financial condition, liquidity, operating results, or cash flows. For example, currency restrictions enacted by the Venezuelan government continue to impact the ability of our subsidiary in Venezuela, or Herbalife Venezuela, to obtain U.S. dollars in exchange for Venezuelan Bolivars at the official foreign exchange rate and limit Herbalife Venezuela’s ability to import U.S. dollar denominated raw materials and finished goods, both of which have significantly negatively impacted our Venezuelan operations. We may be required to fundamentally change or cease operations in Venezuela or any other jurisdiction that may be similarly affected in the future. If these restrictions intensify or do not improve and impact our ability to control our Venezuelan operations, we may be required to deconsolidate Herbalife Venezuela for U.S. GAAP purposes and would be subject to the risk of further impairments.
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Our overall success depends, in part, on our ability to anticipate and effectively manage these risks, and to coordinate the various legal and regulatory requirements of multiple jurisdictions that are constantly evolving and subject to change, and there can be no assurance that we will be able to do so without incurring unexpected or increased costs or at all. In certain regions, the degree of these risks may be higher due to more volatile economic, political, or social conditions; less developed and predictable legal and regulatory regimes; and increased potential for various types of adverse governmental action. As we continue to focus on expanding our existing international operations, these and other similarrisks associated with international operations will likely increase, which could materially harm our business, financial condition, and operating results.
We are subject to the anti-bribery laws, rules, and regulations of the United States and the other foreign jurisdictions in a number of countries.

which we operate.

We are subject to a variety of anti-bribery laws, regarding our international operations,rules, and regulations, including the U.S. Foreign Corrupt Practices Act, or the FCPA, the U.K. Bribery Act of 2010 or the UK Bribery Act, and regulations issued by U.S. Customs and Border Protection, U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, and various foreign governmental agencies. The FCPA, the UK Bribery Act and similar anti-bribery laws, rules, and regulations in the other foreign jurisdictions in which we operate. These regimes generally prohibit companies and their intermediariesintermediaries from making improper payments for the purpose of obtaining or retaining business as well as requiringrequire companies to maintain accurate books and records. In recent years thereThere has been a substantial increase in anti-bribery law enforcement activity with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators and increases in criminal and civil enforcement proceedings brought against companies and individuals.individuals by regulators, including the Department of Justice, or DOJ, and the SEC. Our policies mandate compliance with these anti-bribery laws, rules, and regulations, including the requirements to maintain accurate information and internal controls. We operate in many parts of the world that have experienced governmental corruption to some degree and in certain circumstances, strict compliance with anti-bribery laws, rules, and regulations may conflict with local customs and practices. Notwithstanding our compliance programs, which include annual training and certification requirements, there is no assurance that our internal control policies and procedures will protect us from acts committed by our employees or agents. Additionally, we cannot predict the nature, scope, or effect of future regulatoryanti-bribery requirements to which our international operations might be subject or the manner in which existing or new lawsrequirements might be administered or interpreted. Alleged or actual violations of any such existing or future laws, (eitherrules, or regulations, whether due to our own acts or our inadvertence or due to the acts or inadvertence of others)others, may result in criminal or civil sanctions, including fines, penalties, contract cancellations, or debarment, increased compliance costs, changes to our activities, and loss of reputation, any of which could have a material adverse effect on our business, financial condition, and operating results.
As previously disclosed, the SEC and the DOJ conducted investigations into our compliance with the FCPA in China. Also, as previously disclosed, we conducted our own review and implemented remedial and improvement measures based upon this review, including replacement of certain employees and enhancements of our policies and procedures in China. We cooperated with the SEC and the DOJ and have now reached separate resolutions with each of them. On August 28, 2020, the SEC accepted the Offer of Settlement and issued an administrative order finding that we violated the books and records and internal controls provisions of the FCPA. In addition, on August 28, 2020, we and the DOJ separately entered into a court-approved deferred prosecution agreement, or DPA, under which the DOJ deferred criminal prosecution of the Company for a period of three years related to a conspiracy to violate the books and records provisions of the FCPA. Among other things, we are required to undertake compliance self-reporting obligations for the three-year terms of the agreements with the SEC and the DOJ. If we remain in compliance with the DPA during its three-year term, the deferred charge against us will be dismissed with prejudice. In addition, we paid the SEC and the DOJ aggregate penalties, disgorgement, and prejudgment interest of approximately $123 million in September 2020. Any failure to comply with these agreements, or any resulting further government action, could result in a material and adverse impact to our business, financial condition, and operating results.
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If we do not comply with transfer pricing, customs duties, VAT, and similar regulations, we may be subject to additional taxes, customs duties, interest, and penalties in material amounts, which could materially harm our financial condition and operating results.
As a multinational corporation operating in many countries, we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by our United States and local entities, and that we are taxed appropriately on such transactions. In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products.
If the United States Internal Revenue Service, or the IRS, or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices or our positions regarding the payment of income taxes, customs duties, value added taxes, withholding taxes, and sales and use and other taxes, we could become subject to higher taxes and may increase product prices in certain jurisdictions accordingly. The imposition of new taxes, even pass-through taxes such as VAT could result in increased product prices in certain jurisdictions. Any increases in prices could adversely affect product demand and therefore could have a negative impact on our business, financial condition, and operating results. From time to time, we are a party to various regulatory proceedings related to compliance with applicable tax regulations, including audits, examinations, and investigations. We are currently subject to ongoing audits that are at various levels of review, assessment, or appeal in a number of jurisdictions involving issues of transfer pricing, income taxes, customs duties, value added taxes, withholding taxes, and sales and use and other taxes. In some circumstances, additional taxes, interest, and penalties have been assessed. We have reserved in our consolidated financial statements an amount that we believe represents the most likely outcome of the resolution of these audits, but if we are incorrect in our assessment we may have to pay additional amounts, which could potentially be material. Ultimate resolution of these ongoing audits may take several years, and the outcome is uncertain. See Note 7,
Contingencies
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for further information on contingencies relating to tax matters.
In addition, any change in applicable tax laws, rules, treaties, or regulations, or their interpretation, could result in a higher effective tax rate on our worldwide earnings. For example, The Organisation for Economic
Co-operation
and Development has released guidance covering various international tax standards as part of its “base erosion and profit shifting,” or BEPS, initiative. The anticipated implementation of BEPS by
non-U.S.
jurisdictions in which we operate could result in changes to tax laws, rules, and regulations, including with respect to transfer pricing, that could materially increase our effective tax rate. No assurances can be given that future legislative, regulatory, or judicial developments will not result in an increase in the amount of taxes payable by us. If any such developments occur, our business, financial condition, and operating results could be materially and adversely affected.
Our business in China is subject to general, as well as industry-specific, economic, political, and legal developments and risks and requires that we utilize a modified version of operations.

the business model we use elsewhere in the world.

Our business and operations in China, which generated approximately 15% of our net sales for the year ended December 31, 2020, are subject to unique risks and uncertainties related to general economic, political and legal developments. The Chinese government exercises significant control over the Chinese economy, including by controlling capital investments, allocating resources, setting monetary policy, controlling and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies and issuing necessary licenses to conduct business. Accordingly, any adverse change in the Chinese economy, the Chinese legal system or Chinese governmental, economic or other policies could have a material adverse effect on our business and operations in China and our prospects generally.
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China has published regulations governing direct selling, prohibiting pyramid promotional schemes, regulating
e-commerce,
and a number of related administrative methods and proclamations have been issued. To operate under these regulations, we created and introduced a modified business model specific to China based on our understanding of how Chinese regulators interpret and enforce these regulations, our own interpretation of applicable regulations and the enforcement thereof, and our understanding of the practices of other licensed direct-selling organizations in China.
In China, we sell our products to and through independent service providers and sales representatives, to preferred customers and other customers, as well as through Company-operated retail platforms when necessary. We also have a social
e-commerce
business in China, which enables our sales representatives who are also individual
e-commerce
promoters and independent service providers to promote our products and provide services to our customers in China through virtual online stores. Our independent service providers must meet requirements to operate their own business under Chinese law, which prohibits fraudulent or misleading claims and engaging in any pyramid sales schemes, as well as our policies. In China, our independent service providers receive compensation for marketing, sales support, and other services instead of the Member allowances and royalty overrides utilized in our network marketing plan outside China. The service hours and related fees eligible to be earned by the independent service providers are based on a number of factors, including the sales generated through them and through others to whom they may provide marketing, sales support and other services, the quality of their service, and other factors. Total compensation available to our independent service providers in China can generally be comparable to the total compensation available to other sales leaders globally. The Company does this by performing an analysis in our worldwide system to estimate the potential compensation available to the service providers, which can generally be comparable to that of sales leaders in other countries. After adjusting such amounts for other factors and dividing by each service provider’s hourly rate, we then notify each independent service provider the maximum hours of work for which they are eligible to be compensated in the given month. In order for a service provider to be paid, the Company requires each service provider to invoice the Company for their services and submit a timesheet of such services and, upon the Company’s request, service providers may be required to submit additional supporting documents for the Company’s further verification. These and other business model features in China are not common to the business model we employ elsewhere in the world, and we expect our business model in China will continue to incorporate some or all of these features, and any failure of this model or our business to comply with Chinese law could materially and negatively impact our business, financial condition, and operating results.
Direct-selling regulations in China require us to apply for various approvals to conduct direct selling in China. The process for obtaining the necessary licenses to conduct direct selling is protracted and cumbersome and involves multiple layers of Chinese governmental authorities and numerous governmental employees at each layer. While direct-selling licenses are centrally issued, such licenses are generally valid only in the jurisdictions within which related approvals have been obtained, and such approvals are generally awarded on local and provincial bases. The approval process is guided by distinct Chinese practices and customs, and is subject to applicable laws of China and the other jurisdictions in which we operate our business, including the United States, as well as our internal policies, such as our code of ethics. There is a risk that in attempting to comply with local customs and practices in China during the application process or otherwise, we will fail to comply with applicable requirements or violate the laws of another jurisdiction, any of which could prevent us from obtaining direct-selling licenses or other approvals or result in adverse publicity or legal or regulatory proceedings. Furthermore, we rely on certain key personnel in China to assist us during the approval process, and the loss of any such key personnel could delay or hinder our ability to obtain licenses or related approvals. Accordingly, there can be no assurance that we will obtain additional, or maintain our existing, direct-selling licenses and approvals in China that are important to our business, which could materially and negatively impact our business, financial condition, and operating results.
Additionally, there continues to be uncertainty regarding the interpretation and enforcement of Chinese regulations. The regulatory environment in China continues to evolve, and officials at all levels of the Chinese, provincial, and local government exercise broad discretion in deciding how to interpret, apply, and enforce
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regulations as they deem appropriate. Regulators in China may modify existing, or introduce new, regulations or interpretations. There can be no guarantee that changes in regulations, or their interpretation or enforcement, will not negatively impact our business in China, create industry reputational risk, result in regulatory proceedings, or lead to fines or penalties against us or our Chinese Members. If our business practices are deemed to be in violation of applicable regulations, in particular with respect to the factors used in determining the services a service provider is eligible to perform and service fees they are eligible to earn and receive, we could be sanctioned and/or required to change our business model, either of which could have a significant adverse impact on our business in China. In addition, the Chinese government rigorously monitors markets, including the direct-selling market, in China and in the past has taken serious action against companies engaged in activities that the government regarded as in violation of applicable law, including shutting down their businesses and imposing substantial fines, such as the Review, which investigated unlawful promotion and sales within the health products industry. There is no guarantee the government will not revisit its focus on health products, expand its investigation to cover direct-selling business models, or otherwise launch into a new investigation or multiple investigations that may result in a material adverse effect to our business in China.
The United Kingdom’s vote to exit from the European Union could adversely impact us.

On

In June 23, 2016, in a referendum vote commonly referred to as “Brexit,” a majority of British voters voted to exit the European Union and, in March 2017, the British government delivered formal notice of the U.K.’s intention to leave the European Union. On January 31, 2020, the U.K. formally exited the European Union. The British government is currently in negotiationshas reached a formal agreement with the European Union to determineregarding the terms of the U.K.’s exit. A withdrawalexit, but it is unclear whether additional agreements will need to be negotiated in the future and what long-term economic, financial, trade, and legal implications the exit of the U.K. from the European Union will have and how such exit could affect our business globally and in the region. The exit could potentially disrupt the free movement of goods, services, and people between the U.K. and the European Union, undermine bilateral cooperation in key geographic areas and significantly disrupt trade between the U.K. and the European Union or other nations as the U.K. pursues independent trade relations. In addition, BrexitIt could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which European Union laws to replace or replicate. The effects of Brexit will depend on any agreements the U.K. makes to retain access to European Union or other markets either during a transitional period or more permanently. It is unclear what long-term economic, financial, trade and legal implications the withdrawal of the U.K. from the European Union would have and how such withdrawal would affect our business globally and in the region. In addition, Brexit may lead other European Union member countries to consider referendums regarding their European Union membership. Any of these events, along with any political, economic and regulatory changes that may occur, could cause political and economic uncertainty in Europe and internationallyglobally and materially harm our business, financial condition, and financialoperating results.

Risks Related to Our Indebtedness
The terms and covenants in our existing indebtedness could limit our discretion with respect to certain business matters, which could limitharm our ability to pursue certain strategic objectives and in turn harm ourbusiness, financial condition, and operating results.

Our senior secured credit facility, contains financialor the 2018 Credit Facility, and operatingthe indentures governing the senior notes due September 1, 2025, or the 2025 Notes, and the senior notes due August 15, 2026, or the 2026 Notes, have restrictive covenants that restrictlimit our and our subsidiaries’ ability to, among other things:

pay dividends, redeem share capital or capital stock and make other restricted payments and investments;

sell assets or merge, consolidate, or transfer all or substantially all of our subsidiaries’ assets;
incur or guarantee additional debt;

impose dividend or other distribution restrictions on our subsidiaries; and

create liens on our and our subsidiaries’ assets.

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In addition, our credit facilitythe 2018 Credit Facility requires us to meet certain financial ratios and financial conditions. These covenants could limit our ability to grow our business, take advantage of attractive business opportunities, successfully compete, obtain future financing, withstand future downturns in our business or the economy in general, or otherwise conduct necessary corporate activities.
Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Failure to comply with these covenants could result in aan event of default. Upon the occurrence of an event of default causingunder any of our debt agreements, the lenders or noteholders, as applicable, could cause all outstanding amounts under such agreements to become due and payable, and it could trigger a cross-default with respect to other outstanding indebtedness under our credit facility, whichcertain circumstances. The 2018 Credit Facility is secured by the equity interests of certain of our subsidiaries and substantially all of ourthe assets of the domestic assets, against whichloan parties, and the lenders thereunder could proceed to foreclose.

foreclose on such assets if we are unable to repay or refinance any accelerated debt under the 2018 Credit Facility. Following an event of default, the lenders under our revolving credit facility would also have the right to terminate any commitments they have to provide further borrowings.

We

The required interest payments on our indebtedness under the 2018 Credit Facility or other agreements may be impacted by expected reforms related to the London Interbank Offered Rate, or LIBOR. The variable interest rates applicable under the 2018 Credit Facility are linked to LIBOR as the benchmark rate for establishing such rates. Recent national, international, and other regulatory guidance and reform proposals regarding LIBOR are requiring certain LIBOR tenors to be discontinued or become unavailable by the end of 2021 and LIBOR to be fully discontinued or become unavailable as a benchmark rate by June 2023. Although the 2018 Credit Facility includes mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use from timein place of LIBOR, no assurance can be made that such alternative benchmark rate will perform in a manner similar to timeLIBOR or result in interest rates that are at least as favorable to us as those that would have resulted had LIBOR remained in effect, which could result in an increase in our interest expense and other debt service obligations. In addition, the overall credit market may be disrupted as a certain amountresult of cashthe replacement of LIBOR or in orderthe anticipation thereof, which could have an adverse impact on our ability to satisfy the obligations relating torefinance, reprice, or amend our convertible notes. existing indebtedness or incur additional indebtedness on favorable terms or at all.
The maturityconversion or conversion of anymaturity of our convertible notes may adversely affect our financial condition and operating results, whichand their conversion into common shares could adversely affect the amount or timing of future potentialhave a dilutive effect that could cause our share repurchases or the payment of dividendsprice to our shareholders.

In February 2014, wego down.

We issued convertible senior notes due on AugustMarch 15, 2019,2024, or the 2024 Convertible Notes, in the aggregate principal amount of $1.15 billion. At maturity, we will have$550 million. Prior to pay theDecember 15, 2023, under certain circumstances, holders of the Convertible Notes the full aggregate principal amount of the Convertible Notes then outstanding.

Holders of our 2024 Convertible Notes may convert their notes at their option under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending March 31, 2014, if the last reported sale price of our common shares for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price for the Convertible Notes on each applicable trading day; (ii) during the five business-day period immediately after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of our common shares and the conversion rate for the Convertible Notes for each such day; or (iii) upon the occurrence of specified corporate events.option. On and after MayDecember 15, 2019,2023, holders may convert their 2024 Convertible Notes at any time, regardless of the foregoing circumstances. time.

The 2024 Convertible Notes are net-share settled.may be settled in cash, common shares, or a combination of cash and common shares, at our option. If one or more holders elect to convert their 2024 Convertible Notes when conversion is permitted, we could be requiredelect to make cash payments equal to the par amount of each Convertible Note,satisfy our conversion obligations, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their 2024 Convertible Notes, because our Convertible Notes are net-share settled, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal amount of our 2024 Convertible Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital. The requirement to payPayment of cash upon conversion of the 2024 Convertible Notes, or any adverse change in the accounting treatment of the 2024 Convertible Notes, may adversely affect our financial condition and operating results, each of which could in turn adversely impact the amount or timing of future potential share repurchases or the payment of dividends to our shareholders.

The conversion of any of the Convertible Notes into common shares could have a dilutive effect that could cause our share price to go down.

The Convertible Notes, until May 15, 2019, are convertible into common shares only

In addition, if specified conditions are met and thereafter convertible at any time, at the option of the holder. We have reserved common shares for issuance upon conversion of the Convertible Notes. Upon conversion, the principal amount is due in cash, and to the extent that the conversion value exceeds the principal amount, the difference is due in common shares. While we have entered into capped call transactions to effectively increase the conversion of the Convertible Notes and lessen the risk of dilution to shareholders upon conversion, if the market price of our common shares, as measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions, the number of our common shares we receive upon exercise of the capped call transactions will be capped. In that case, there would be dilution in respect of our common shares, because the number of our common shares or amounts of cash that we would owe upon conversion of the Convertible Notes in excess of the principal amount of converted Convertible Notes would exceed the number of common shares that we would be entitled to receive upon exercise of the capped call transactions, which would cause a dilutive effect that could cause our share price to go down. If any or all of the 2024 Convertible Notes are converted into common shares, our existing shareholders will experience immediate dilution of voting rights and our common share price may decline. Furthermore,
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the perception that such dilution could occur may cause the marketour share price of our common shares to decline.

The conversion rate for the Convertible Notes as of February 7, 2014, the date of issuance thereof, was 11.5908 common shares per $1,000 principal amount or a conversion price of approximately $86.28 per common share. Because the conversion rate of the 2024 Convertible Notes adjusts upward upon the occurrence of certain events, such as a dividend payment, our existing shareholders may experience morefurther dilution if any or all of the 2024 Convertible Notes are converted into common shares afterand the currently effective adjusted conversion rates became effective.


If we do not comply with transfer pricing, customs duties, VAT, and similar regulations, then we may be subjected to additional taxes, duties, interest and penalties in material amounts, which could harmrate is further adjusted. For more information regarding the conversion features of our financial condition and operating results.

As a multinational corporation, operating in many countries2024 Convertible Notes, including the United States, we are subject to transfer pricing and other tax regulations designed to ensureevents that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by our United States or local entities, and that we are taxed appropriately on such transactions. In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products. We are currently subject to pending or proposed audits that are at various levels of review, assessment or appeal in a number of jurisdictions involving transfer pricing issues, income taxes, customs duties, value added taxes, withholding taxes, sales and use and other taxes and related interest and penalties in material amounts. In some circumstances, additional taxes, interest and penalties have been assessed and we will be required to pay the assessments or post surety, in order to challenge the assessments.

The imposition of new taxes, even pass-through taxes such as VAT, could have an impact on our perceived product pricing and will likely require that we increase prices in certain jurisdictions and therefore could have a potential negative impact on our business and results of operations. We have reserved in our consolidated financial statements an amount that we believe represents the most likely outcome of the resolution of these disputes, but if we are incorrect in our assessment we may have to pay the full amount asserted which could potentially be material. Ultimate resolution of these matters may take several years,allow for early conversion and the outcome is uncertain. If the United States Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices or our positions regarding the payment of income taxes, customs duties, value added taxes, withholding taxes, sales and use, and other taxes, we could become subject to higher taxes, we may determine it is necessary to raise prices in certain jurisdictions accordingly and our revenue and earnings and our results of operations could be adversely affected.

Seecurrent conversion rate, see Note 7, Contingencies5,

Long-Term Debt
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K for further information on contingencies relating10-K.
Risks Related to VAT and other related matters.

U.S. Tax Reform may adversely impact certain U.S. shareholders of the Company.

The Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”) was enacted on December 22, 2017. U.S. Tax Reform is expected to impact whether we, or any of our non-U.S. corporate subsidiaries, are treated as controlled foreign corporations (“CFCs”), including on a retroactive basis. This may result in certain U.S. shareholders being subject to special and potentially adverse tax treatment, including the current inclusion of income of certain of our foreign subsidiaries.

A company will be classified as a CFC, for any particular taxable year, if U.S. persons (including individuals and entities) who own 10% or more of the voting power or value (the “10% Tests”) of the shares (“10% U.S. Shareholders”) own, in the aggregate, more than 50% of the total combined voting power or value of the shares. In determining the voting power of the shares, special voting rights to appoint directors, whether by law, agreement, or other arrangement, may also be taken into account. For purposes of applying the 10% Tests, certain constructive ownership rules apply, which attribute share ownership among certain family members and certain entities and their owners. The constructive ownership rules may also attribute share ownership to persons (including individuals and entities) that are entitled to acquire shares pursuant to an option, such as the holders of our Convertible Notes. U.S. Tax Reform expanded the constructive ownership rules causing non-U.S. corporations that were not previously classified as CFCs to become CFCs. These constructive ownership rules are significantly complex and circumstance specific.

As a result of U.S. Tax Reform, one or more of our non-U.S. corporate subsidiaries not previously classified as CFCs will now likely be CFCs (the “New Herbalife CFC Subsidiaries”). Any such New Herbalife CFC Subsidiary will be treated as a CFC for its 2017 and future taxable years as determined on a year-by-year basis. As a result of one or more of our non-U.S. corporate subsidiaries being classified as New Herbalife CFC Subsidiaries, our 10% U.S. Shareholders will be subject to special and potentially adverse tax treatment on an on-going basis, including the inclusion of certain income generated during each taxable year by such New Herbalife CFC Subsidiaries. Any shareholders who own, or contemplate owning, 10% or more of our shares (taking into account the impact of any share repurchases we may undertake pursuant to share repurchase programs as well as the impact of the constructive ownership rules) are urged to consult their tax advisors with respect to the special rules applicable to 10% U.S. Shareholders of CFCs.


Further, under U.S. Tax Reform, a one-time tax is imposed upon 10% U.S. Shareholders on certain historic accumulated, undistributed foreign earnings of CFCs and other “specified foreign corporations,” which earnings have not been previously subject to tax at the U.S. shareholder level (the “Mandatory Repatriation Tax”). A specified foreign corporation is any CFC or other non-U.S. corporation that has at least one U.S. corporate shareholder that is a 10% U.S. Shareholder. The Company believes that it may be classified as a specified foreign corporation and that one or more of its non-U.S. corporate subsidies may be classified as specified foreign corporations. Because the rules relating to the Mandatory Repatriation Tax are subject to additional guidance, including anticipated Internal Revenue Service pronouncements or other clarifications, shareholders who own, or contemplate owning, 10% or more of our shares (taking into account the impact of any share repurchases we may undertake pursuant to share repurchase programs as well as the impact of the constructive ownership rules) are urged to consult their tax advisors.

No assurances can be given that future legislative, administrative, or judicial developments will not result in an increase in the amount of U.S. taxes payable by an investor in our shares. If any such developments occur, such developments could have a material and adverse effect on an investment in our shares.

Changes in tax laws, treaties or regulations, or their interpretation could adversely affect us.

A change in applicable tax laws, treaties or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial results. The Organisation for Economic Co-operation and Development has, within recent years, released guidance covering various international tax standards as part of its “base erosion and profit shifting” or “BEPS” initiative. The anticipated implementation of BEPS by non-U.S. jurisdictions in which we operate could result in changes to tax laws and regulations, including with respect to transfer pricing that could materially increase our effective tax rate.

No assurances can be given that future legislative, administrative, or judicial developments will not result in an increase in the amount of U.S. taxes payable by us or our subsidiaries. If any such developments occur, our business, financial condition, and results of operations could be materially and adversely affected.

We may be held responsible for certain taxes or assessments relating to the activities of our Members, which could harm our financial condition and operating results.

Our Members are subject to taxation, and in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes and social contributions, and to maintain appropriate records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security, withholding or other taxes with respect to payments to our Members. In addition, in the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat our Members as employees, or that our Members are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors under existing laws and interpretations, we may be held responsible for social security contributions, withholding and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results. See Note 7, Contingencies, to the Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K for a more specific discussion of contingencies related to the activities of our Members.

We may incur material product liability claims, which could increase our costs and harm our financial condition and operating results.

Our ingestible products include vitamins, minerals and botanicals and other ingredients and are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain some ingredients that do not have long histories of human consumption. We rely upon published and unpublished safety information including clinical studies on ingredients used in our products and conduct limited clinical studies on some key products but not all products. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. As a marketer of dietary and nutritional supplements and other products that are ingested by consumers or applied to their bodies, we have been, and may again be, subjected to various product liability claims, including that the products contain contaminants, the products include inadequate instructions as to their uses, or the products include inadequate warnings concerning side effects and interactions with other substances. It is possible that widespread product liability claims could increase our costs, and adversely affect our revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims, thereby requiring us to pay substantial monetary damages and adversely affecting our business. Finally, given the level of self-insured retentions that we have accepted under our current product liability insurance policies, which is $12.5 million, in certain cases we may be subject to the full amount of liability associated with any injuries, which could be substantial.

Common Shares

Holders of our common shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Cayman Islands Companies Law (2016 Revision)Act (as revised), or the Companies Law,Act, and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly establisheddefined as and may be different from those under statutes or judicial precedent in existence in jurisdictions in the United States. In particular, the Cayman Islands has a less prescriptive body of corporate laws compared to the United States, and certain states, such as Delaware, may have more fulsome and judicially interpreted bodies of corporate law. Therefore, shareholders may have more difficulty in protecting their interests in the face of actions by our management or board of directors than would shareholders of a corporation incorporated in a jurisdiction in the United States due to the comparatively less developed nature of Cayman Islands law in this area.

ShareholdersStates.

For example, shareholders of Cayman Islands exempted companies such as Herbalife Nutrition Ltd. have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of our shareholders. Our directors have discretion under our articles of association to determine whether, or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

A shareholder can bringmay have a suit personallydirect right of action against us where its individual rights have been, or are about to be, infringed. Our Cayman Islands counsel, Maples and Calder, is not aware of any reported class action having been brought in a Cayman Islands court. Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed the availability of such actions. In most cases, however, we would be the proper plaintiff where an action is brought to redress any loss or damage suffered by us, or based on a breach of duty owed to us, and a claim, against, for example, against our officers or directors, usually may not be brought by a shareholder. However, based on English authorities, which would in all likelihoodlikely be of persuasive authority and be applied by a court in the Cayman Islands, exceptions to the foregoing principle may apply and a shareholder may be permitted to bring a claim derivatively on a company's behalf, where:

a company is acting or proposing to act illegally or outside the scope of its corporate authority;

the act complained of, although not acting outsidebeyond the scope of itsthe company’s corporate authority, could be effected only if authorized by more than a simple majority vote;the number of votes of the shareholders of the company actually obtained; or

those who control the company are perpetrating a “fraud on the minority”.

Provisions of our articles of association and Cayman Islands corporate law may impede a takeover or make it more difficult for shareholders to change the direction or management of the Company, which could reduce shareholders’ opportunity to influence management of the Company.

Our articles of association contain certain provisions which could have an effect of discouraging a takeover or other transaction or preventing or making it more difficult for shareholders to change the direction or
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management of our Company. For example, our articles of association permit our board of directors to issue preference shares from time to time, with such rights and preferences as they consider appropriate. Our board of directors could authorize the issuance of preference shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction.

In addition, our articles of association contain certain other provisions which could have an effect of discouraging a takeover or other transaction or preventing or making it more difficult for shareholders to changeprohibit the direction or management of our Company, including the inabilityability of shareholders to act by written consent, a limitation onlimit the ability of shareholders to call special meetings of shareholders, and contain advance notice provisions. As a result, our shareholders may have less input into the management of our Company than they might otherwise have if these provisions were not included in our articles of association.

The Cayman Islands haveCompanies Act contains provisions under the Companies Law to facilitate mergers and consolidations between Cayman Islands companies and
non-Cayman
Islands companies.companies (provided that is facilitated by the laws of such other jurisdiction). These provisions, contained within Part XVI of the Companies Law,Act, are broadly similar to the merger provisions provided for under Delaware Law.

law.

There are, however, a number of important differences that could impede a takeover. First,For example, the threshold for approval of the merger plan by shareholders is higher. The threshold is a special resolution of the shareholders (being 66 2/2⁄3% of those present in person or by proxy and voting) together with such other authorization, if any, as may be specified in the articles of association.

Additionally, the consent of each holder of a fixed or floating security interest (in essence a documented security interest as opposed to one arising by operation of law) is required to be obtained unless the Grand Court of the Cayman Islands waives such requirement.


The merger provisions contained within Part XVI of the Companies Law do contain shareholder appraisal rights similar to those provided for under Delaware law. Such rights are limited to a merger under Part XVI and do not apply to schemes of arrangement as discussed below.

The Companies Law alsoAct contains separate statutory provisions that provide for the merger, reconstruction, and amalgamation of companies.companies pursuant to court-approved arrangements. These are commonly referred to in the Cayman Islands as “schemes of arrangement.”

The procedural and legal requirements necessary to consummate these transactionsa scheme of arrangement are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law and practice, a scheme of arrangement in relation to a solvent Cayman Islands company must be approved at a shareholders’ meeting by a majority in number of each class of the company’s shareholders who are present and voting (either in person or by proxy) at such meeting. The shares voted in favor of the scheme of arrangement must also represent at least 75% of the value of each relevant class of the company’s shareholders present and voting at the meeting. The convening of these meetings and the terms of the amalgamationarrangement must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise materially adversely affect creditors’ interests. Furthermore, the court will only approve a scheme of arrangement if it is satisfied that:

the company is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to majority vote have been complied with;

the shareholders who voted at the meeting in question fairly represent the relevant class of shareholders to which they belong;

the scheme of arrangement is such as a businessman would reasonably approve; and

the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

Act or that would amount to a “fraud on the minority.”

If the scheme of arrangement is approved, the dissenting shareholdershareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

In addition, if an offer by a third party to purchase shares in us has been approved by the holders of at least 90% of ourthe issued and outstanding shares (not including shares held by such a third party) pursuant to an offer within a four-month periodfour months of the third party making such an offer, the purchaserthird party may, during the two months following expiration of the four-month
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period, require the holders of the remaining shares to transfer their shares on the same terms on which the purchaser acquired the first 90% of ourthe issued and outstanding shares. An objection can be made to the Grand Court of the Cayman Islands, but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.

There is uncertainty as to shareholders’ ability to enforce certain foreign civil liabilities in the Cayman Islands.

We are incorporated as an exempted company with limited liability under the laws of the Cayman Islands. AIslands and a material portion of our assets are located outside of the United States. As a result, it may be difficult for our shareholders
Herbalife Nutrition Ltd. has been advised by its Cayman Islands legal counsel, Maples and Calder, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against Herbalife Nutrition Ltd. judgments against us or judgments obtained in U.S.of courts of the United States predicated upon the civil liability provisions of the federalsecurities laws of the United States or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against Herbalife Nutrition Ltd. predicated upon the civil liability provisions of the securities laws of the United States or any state, ofso far as the United States.

We have been advisedliabilities imposed by our Cayman Islands counsel, Maples and Calder, thatthose provisions are penal in nature. ln those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment byof a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given — recognize and enforceprovided certain conditions are met. For a foreign money judgment of a court of competent jurisdiction ifto be enforced in the Cayman Islands, such judgment ismust be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, and was notmatter, impeachable on the grounds of fraud, or obtained in a manner, and is notor be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands. There is doubt, however, asIslands (awards of punitive or multiple damages may well be held to whether the Grand Court of thebe contrary to public policy). A Cayman Islands will (1) recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States, or (2) in original actions brought in the Cayman Islands, impose liabilities predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States, on the grounds that such provisions are penal in nature.

The Grand Court of the Cayman Islandscourt may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.


Mail addressed to the Company and received at its registered office will be forwarded unopened to the forwarding address supplied by the Company. None of Herbalife Nutrition Ltd., its directors, officers, advisors or service providers (including the organization that provides registered office services in the Cayman Islands) will bear any responsibility for any delay caused in mail reaching the forwarding address.

Our stock price

U.S. Tax Reform may be adversely affected by third parties who raise allegations about ourimpact certain U.S. shareholders of the Company.

Short sellers and others who raise allegations regarding the legality

If a U.S. shareholder owns 10% or more of our business activities, some of whom are positioned to profit if our stock declines, can negatively affect our stock price. In late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program and announced that his fund had taken a significant short position regarding our common shares, leadingit may be subject to intense public scrutinyincreased U.S. federal income taxation under the “controlled foreign corporation,” or CFC, rules. A
non-U.S.
corporation will be classified as a CFC for any particular taxable year, if U.S. persons (including individuals and significant stock price volatility. Following this public announcemententities) who own (directly, indirectly, or constructively) 10% or more of the voting power or value of shares, or 10% U.S. Shareholders, own, in December 2012, our stock price dropped significantly. This hedge fund manager continuesthe aggregate, more than 50% of the total combined voting power or value of the shares. In determining whether a shareholder is treated as a 10% U.S. Shareholder, the voting power of the shares and any special voting rights, such as to make allegations regardingappoint directors, may also be taken into account. In addition, certain constructive ownership rules apply, which attribute share ownership among certain family members and certain entities and their owners. Such constructive ownership rules may also attribute share ownership to persons that are entitled to acquire shares pursuant to an option, such as the legalityholders of our network marketing program,2024 Convertible Notes.
As a result of certain changes to the CFC constructive ownership rules introduced by the Tax Cuts and Jobs Act of 2017, or U.S. Tax Reform, one or more of our product safety, our accounting practices
non-U.S.
corporate subsidiaries that were not previously classified as CFCs are now classified as CFCs, including on a retroactive basis. For 10% U.S. Shareholders, this may result in adverse tax consequences. Generally, 10% U.S. Shareholders of a CFC are required to include currently in gross income their respective shares of (i) the CFC’s “Subpart F income” (e.g. items of passive
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income and other matters. Additionally,certain income resulting from time to timeinter-company sales and services), (ii) the Company isCFC’s earnings (that have not been subject to governmentaltax under the Subpart F rules) to the extent the CFC holds certain U.S. property, and regulatory inquiries(iii) the CFC’s global intangible
low-taxed
income pursuant to the U.S. Tax Reform. Such 10% U.S. Shareholders are subject to current U.S. federal income tax with respect to the foregoing income items, even if the CFC has not made an actual distribution to such shareholders.
While we do not believe that Herbalife Nutrition Ltd. is classified as a CFC, such entity and inquiriesone or more of our
non-U.S.
corporate subsidiaries not already classified as CFCs could become classified as CFCs either as a result of (i) additional changes to tax laws, rules, or regulations, including future pronouncements or other guidance from legislators that may adversely affect our stock price. Our stock price has continued to exhibit heightened volatility and the short interestIRS or (ii) an increase in the percentage ownership of our common shares continues to remain high. Short sellers expect to make a profit ifby shareholders who hold, or in the future may hold, 10% or more of our common shares, declinewhether as a result of future share acquisitions, the impact of any share repurchases we may undertake, or otherwise.
Further, under U.S. Tax Reform, a
one-time
tax is imposed upon our 10% U.S. Shareholders on certain historic accumulated, undistributed foreign earnings of CFCs and other “specified foreign corporations,” which earnings have not been previously subject to tax at the 10% U.S. Shareholder level. A specified foreign corporation is any CFC or other
non-U.S.
corporation that has at least one U.S. corporate shareholder that is a 10% U.S. Shareholder. Herbalife Nutrition Ltd. believes that it may be classified as a specified foreign corporation and that one or more of our
non-U.S.
corporate subsidiaries may be classified as specified foreign corporations.
Shareholders who own, or contemplate owning, 10% or more of our shares (taking into account the impact of any share repurchases we may undertake and the constructive ownership rules) are urged to consult their tax advisors.
No assurances can be given that future legislative, administrative, or judicial developments will not result in value, and their actions and their public statements may cause further volatilityan increase in the amount of U.S. taxes payable by an investor in our share price. Whileshares. If any such developments occur, such developments could have a number of traders have publicly announced that they have taken long positions contrary to the hedge fund shortingmaterial and adverse effect on an investment in our shares, the existence of such a short interest position and the related publicity may lead to continued volatility. The volatility of our stock may cause the value of a shareholder’s investment to decline rapidly.

shares.

Item 1B.

UNRESOLVED STAFF COMMENTS

Unresolv
ed Staff Comments

None.

Item 2.

PROPERTIES

Pr
operties

As of December 31, 2017,2020, we leased the majority of our physical properties. We currently lease approximately 128,00095,000 square feet in downtown Los Angeles, California, including our corporate executive offices located in the LA Live complex with the lease termsterm expiring in 2019 and 2033. We also lease approximately 110,000140,000 square feet, with the lease term expiring in 2021,2033, and own approximately 190,000189,000 square feet of general office space in Torrance, California, for our North America and South America regional headquarters, including some of our corporate support functions. Additionally, we lease distribution center facilities in Los Angeles, California and Memphis, Tennessee of approximately 255,000 square feet and 259,000 square feet, respectively. The Los Angeles and Memphis lease agreements have terms through 20212031 and 2023, respectively. We also recently executed a lease for approximately 177,000 square feet of warehouse space for a new distribution center in Hagerstown, Maryland, which is expected to commence in 2021 and expires in 2032. In Lake Forest, California, we also lease warehouse, manufacturing plant and office space of approximately 123,000 square feet under leases expiring in 20192029. Additionally, we executed a lease in late 2020 to expand our facility in Lake Forest by 42,000 square feet, which is expected to commence in the second quarter of 2021 and 2020.expires in 2029. In Venray, Netherlands, we lease our European centralized warehouse of approximately 257,000278,000 square feet under an arrangement expiring in 2020.2025. In Changsha, Hunan, China we are leasing our botanical extraction facility of approximately 178,000154,000 square feet with the term expiring in 2022. In Suzhou, China we are leasing our manufacturing facilities and warehouse facilities of approximately 81,000 square feet and 60,000121,000 square feet,
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respectively, under leases expiring in 2022 and 2019,2024, respectively. In Nanjing, China, we are leasing an additional manufacturing facility of approximately 372,000 square feet under a lease expiring in 2025. In Guadalajara, Mexico, we lease approximately 216,000234,000 square feet of office space, the majority of which include shared service functionshouses a Global Business Service Center that support the North America and South America regions,supports worldwide operations, under leases expiring in 20182023 and 2023.2027. In PolandBangalore, India, we executed a lease for approximately 155,000 square feet of office space for our existing Global Business Service Center which we plan to relocate, which is expected to commence in 2021 and Malaysia, weexpires in 2026. We also lease office space for shared service functions that support the EMEAGlobal Business Service Centers in Querétaro, Mexico; Krakow, Poland; and APAC regions, respectively.Kuala Lumpur, Malaysia. In addition to the properties noted above, we also lease other warehouse, manufacturing, and office buildings in a majority of our other geographic areas of operation.

We own a manufacturing facility in Winston-Salem, North Carolina. The manufacturing facility contains approximately 800,000 square feet of manufacturing and office space. See Item 1,
Business
for further discussion of the manufacturing facility purchased in Winston-Salem, North Carolina.

We believe that our existing facilities are adequate to meet our current requirements and that comparable space is readily available at each of these locations.

Item 3.

LEGAL PROCEEDINGS

Legal
Proceedings

The information set forth under Note 7,
Contingencies
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
is incorporated herein by reference.

Item 4.

MINE SAFETY DISCLOSURE

Mine Saf
ety Disclosures

Not applicable.


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PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant
s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Information with Respect to our Common Shares

Our common shares are listed on the New York Stock Exchange, or NYSE, and trade under the symbol “HLF.” The following table sets forth the range of the high and low sales prices for our common shares in each of the fiscal quarters presented, based upon quotations on the NYSE consolidated transaction reporting system.

Quarter Ended

 

High

 

 

Low

 

March 31, 2017

 

$

62.50

 

 

$

48.20

 

June 30, 2017

 

$

74.49

 

 

$

56.81

 

September 30, 2017

 

$

73.99

 

 

$

60.71

 

December 31, 2017

 

$

79.64

 

 

$

64.25

 

Quarter Ended

 

High

 

 

Low

 

March 31, 2016

 

$

63.59

 

 

$

42.26

 

June 30, 2016

 

$

66.26

 

 

$

54.00

 

September 30, 2016

 

$

72.22

 

 

$

57.05

 

December 31, 2016

 

$

64.38

 

 

$

47.62

 

The market price of our common shares is subject to fluctuations in response to variations in our quarterly operating results, general trends in the market for our products and product candidates, economic and currency exchange issues in the foreign markets in which we operate as well as other factors, many of which are not within our control. In addition, broad market fluctuations, as well as general economic, business and political conditions may adversely affect the market for our common shares, regardless of our actual or projected performance.

The closing price of our common shares on February 15, 2018,10, 2021, was $83.88.$58.20. The approximate number of holders of record of our common shares as of February 15, 201810, 2021 was 573.505. This number of holders of record does not represent the actual number of beneficial owners of our common shares because shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners who have the right to vote their shares.


Performance Graph

Set forth below is information comparing the cumulative total shareholder return and share price appreciation plus dividends on our common shares with the cumulative total return of the S&P 500 Index and a market weightedmarket-weighted index of publicly traded peers over the five year period ended December 31, 2017.2020. The graph assumes that $100 is invested in each of our common shares, the S&P 500 Index, and the index of publicly traded peers on December December��31, 20122015 and that all dividends were reinvested. The publicly traded companies in the peer group are Avon Products,Conagra Brands, Inc., Nature’s Sunshine Products,The Hain Celestial Group, Inc., Tupperware Corporation, Nu Skin Enterprises, Inc., Post Holdings, Inc., Tupperware Brands Corporation, and USANA Health Sciences, Inc., Weight Watchers International, The Company updated its peer group during the year ended December 31, 2020 as Avon Products, Inc. was acquired by Natura &Co in 2020 and Mannatech, Inc.

is no longer a publicly traded company and therefore no longer included in our peer group.

 

December 31,

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

Herbalife Ltd.

$

100.00

 

 

$

244.62

 

 

$

117.71

 

 

$

167.42

 

 

$

150.31

 

 

$

211.44

 

S&P 500 Index

$

100.00

 

 

$

132.39

 

 

$

150.51

 

 

$

152.59

 

 

$

170.84

 

 

$

208.14

 

Peer Index

$

100.00

 

 

$

157.29

 

 

$

88.17

 

 

$

69.93

 

 

$

72.57

 

 

$

93.73

 

47

Table of Contents
   
December 31,
   
2015
  
2016
  
2017
  
2018
  
2019
  
2020
Herbalife Nutrition Ltd.
   $100.00   $89.78   $126.30   $219.88   $177.81   $179.22
S&P 500 Index
   $100.00   $111.96   $136.40   $130.42   $171.49   $203.04
Old Peer Group(1)
   $100.00   $118.17   $120.63   $87.26   $113.41   $127.94
New Peer Group(2)
   $100.00   $106.12   $125.05   $132.58   $95.97   $118.65
(1)
The Old Peer Group consists of Avon Products, Inc., Conagra Brands, Inc., The Hain Celestial Group, Inc., Nu Skin Enterprises, Inc., Post Holdings, Inc., Tupperware Brands Corporation, and USANA Health Sciences, Inc.
(2)
The New Peer Group consists of Conagra Brands, Inc., The Hain Celestial Group, Inc., Nu Skin Enterprises, Inc., Post Holdings, Inc., Tupperware Brands Corporation, and USANA Health Sciences, Inc.
Information with Respect to Dividends

On April 28, 2014, we announced that our board of directors approved terminating our quarterly

We have not declared or paid cash dividend and instead utilizing the cash to repurchase additional common shares. There were no dividends paid and declared during fiscal year 2017 and 2016. since 2014. The declaration of future dividends is subject to the discretion of our board of directors and will depend upon various factors, including our earnings, financial condition, Herbalife Nutrition Ltd.’s available distributable reserves under Cayman Islands law, restrictions imposed by our senior secured credit facility and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by our board of directors.


Information with Respect to Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth as of December 31, 2017, information with respect to (a) number of securities to be issued upon exercise of outstanding options, warrants and rights, (b) the weighted-average exercise price of outstanding options, warrants and rights and (c) the number of securities remaining available for future issuance under equity compensation plans.

 

 

Number of Securities

to be Issued

Upon Exercise of

Outstanding Options,

Warrants and Rights

(3)

 

 

Weighted Average

Exercise Price of

Outstanding Options,

Warrants and Rights

 

 

Number of Securities

Remaining Available for

Future Issuance Under

Equity Compensation Plans

(Excluding Securities

in Column (a))(2)

 

 

 

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans approved by

    security holders(1)

 

 

3,454,310

 

 

$

46.72

 

 

 

5,890,406

 

Equity compensation plans not approved by

    security holders

 

 

 

 

$

 

 

 

 

Total

 

 

3,454,310

 

 

$

46.72

 

 

 

5,890,406

 

(1)

Consists of four plans: The Amended and Restated Herbalife Ltd. 2005 Stock Incentive Plan, the Amended and Restated Herbalife Ltd. 2014 Stock Incentive Plan, the Amended and Restated Herbalife Ltd. Independent Directors Deferred Compensation and Stock Unit Plan, and the Amended and Restated Non-Management Directors Compensation Plan. In February 2008, a shareholder approved Employee Stock Purchase Plan was implemented. The terms of these plans are summarized in Note 9, Share-Based Compensation, to the Consolidated Financial Statements.

(2)

Includes 1.7 million common shares available for future issuance under the shareholder approved Employee Stock Purchase Plan which was implemented in February 2008.

(3)

Number of securities to be issued upon exercise of stock appreciation rights was calculated using the market price as of December 31, 2017.

Information with Respect to Purchases of Equity Securities by the Issuer

On February 21, 2017,October 30, 2018, our board of directors authorized a new three-yearfive-year $1.5 billion share repurchase program that will expire on February 21, 2020,October 30, 2023, which replaced our prior share repurchase authorization whichthat was set to expire on June 30, 2017 which, as of December 31, 2016,February 21, 2020 and had approximately $233$113.3 million of remaining authorized capacity.capacity when it was replaced. This share repurchase program allows us, which includes a wholly ownedan indirect wholly-owned subsidiary of Herbalife Nutrition Ltd., to repurchase our common shares at such times and prices as determined by our management, as market conditions warrant, and to the extent Herbalife Nutrition Ltd.’s distributable reserves are available under Cayman Islands law. The senior secured credit facility2018 Credit Facility permits us to repurchase our common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met. As of December 31, 2017,2020, the remaining authorized capacity under our $1.5 billion share repurchase program was approximately $713.6$607.9 million.

See Note 15,

Subsequent Events
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on Form 10-K for more information regarding share repurchases and the new share repurchase authorization.
The following table is a summary of our repurchases of common shares during the three months ended December 31, 2017, which includes shares repurchased in the modified Dutch auction tender offer completed in October 2017 and other shares repurchased in the open market by our indirect wholly owned subsidiary.2020. For further information on our share repurchases during the year ended December 31, 2020, see Note 8,
Shareholders’ (Deficit) EquityDeficit
, to the Consolidated Financial Statements.

Statements included in Part IV, Item 15,

Period

 

Total

Number

of Shares

Purchased

 

 

Average

Price

Paid per

Share

 

 

Total Number

of Shares

Purchased as

Part of Publicly

Announced

Plans or

Programs

 

 

Approximate

Dollar

Value of Shares

that May Yet Be

Purchased Under

the Plans or

Programs

 

October 1 — October 31

 

 

6,732,300

 

 

$

68.00

 

 

 

6,732,300

 

 

$

743,021,619

 

November 1 — November 30

 

 

143,669

 

 

$

67.01

 

 

 

143,669

 

 

$

733,394,288

 

December 1 — December 31

 

 

290,461

 

 

$

68.19

 

 

 

290,461

 

 

$

713,588,699

 

 

 

 

7,166,430

 

 

$

67.99

 

 

 

7,166,430

 

 

$

713,588,699

 

Exhibits, Financial Statement Schedules

, of this Annual Report on

Form 10-K.
   
Total Number of
Shares Purchased
  
Average Price Paid
per Share
  
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
  
Approximate Dollar
Value of Shares That
May Yet Be
Purchased Under the
Plans or Programs
October 1 — October 31
    —     $—      —     $682,860,678
November 1 — November 30
    947,800   $47.57    947,800   $637,778,537
December 1 — December 31
    604,458   $49.43    604,458   $607,900,292
   
 
 
       
 
 
    
    1,552,258   $48.29    1,552,258   $607,900,292
   
 
 
       
 
 
    
48

Table of Contents

Item 6.

SELECTED FINANCIAL DATA

Selecte
d Financial Data

The following table sets forth certain of our historical financial data. We have derived the selected historical consolidated financial data for the years ended December 31, 2020, 2019, 2018, 2017, 2016, 2015, 2014 and 20132016 from our consolidated financial statements and the related notes. Not all periods shown below are discussed in this Annual Report on
Form 10-K.
The selected consolidated historical financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, and the historical consolidated financial statements and accompanying notes included elsewhere in this Annual Report on
Form 10-K.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

(In millions except per share data)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

4,427.7

 

 

$

4,488.4

 

 

$

4,469.0

 

 

$

4,958.6

 

 

$

4,825.3

 

Cost of sales

 

 

848.6

 

 

 

854.6

 

 

 

856.0

 

 

 

982.9

 

 

 

963.4

 

Gross profit

 

 

3,579.1

 

 

 

3,633.8

 

 

 

3,613.0

 

 

 

3,975.7

 

 

 

3,861.9

 

Royalty overrides

 

 

1,254.2

 

 

 

1,272.6

 

 

 

1,251.4

 

 

 

1,471.1

 

 

 

1,497.5

 

Selling, general and administrative expenses

 

 

1,758.6

 

 

 

1,966.9

 

 

 

1,784.5

 

 

 

1,991.1

 

 

 

1,629.1

 

Other operating income

 

 

(50.8

)

 

 

(63.8

)

 

 

(6.5

)

 

 

 

 

 

 

Operating income

 

 

617.1

 

 

 

458.1

 

 

 

583.6

 

 

 

513.5

 

 

 

735.3

 

Interest expense, net

 

 

146.3

 

 

 

93.4

 

 

 

94.9

 

 

 

79.2

 

 

 

18.6

 

Other (income) expense, net

 

 

(0.4

)

 

 

 

 

 

2.3

 

 

 

13.0

 

 

 

 

Income before income taxes

 

 

471.2

 

 

 

364.7

 

 

 

486.4

 

 

 

421.3

 

 

 

716.7

 

Income taxes(1)

 

 

257.3

 

 

 

104.7

 

 

 

147.3

 

 

 

112.6

 

 

 

189.2

 

Net income

 

$

213.9

 

 

$

260.0

 

 

$

339.1

 

 

$

308.7

 

 

$

527.5

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.70

 

 

$

3.13

 

 

$

4.11

 

 

$

3.58

 

 

$

5.14

 

Diluted

 

$

2.58

 

 

$

3.02

 

 

$

3.97

 

 

$

3.40

 

 

$

4.91

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

79.2

 

 

 

83.0

 

 

 

82.6

 

 

 

86.3

 

 

 

102.6

 

Diluted

 

 

82.9

 

 

 

86.1

 

 

 

85.3

 

 

 

90.8

 

 

 

107.4

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail value(2)

 

$

7,058.5

 

 

$

7,119.8

 

 

$

6,994.4

 

 

$

7,843.0

 

 

$

7,514.0

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

590.8

 

 

 

367.3

 

 

 

628.7

 

 

 

511.4

 

 

 

772.9

 

Investing activities

 

 

(97.8

)

 

 

(141.3

)

 

 

(73.4

)

 

 

(201.3

)

 

 

(150.8

)

Financing activities

 

 

(85.2

)

 

 

(252.3

)

 

 

(250.0

)

 

 

(389.5

)

 

 

30.7

 

Depreciation and amortization

 

 

99.8

 

 

 

98.3

 

 

 

98.0

 

 

 

93.2

 

 

 

84.7

 

Capital expenditures(3)

 

 

95.1

 

 

 

144.3

 

 

 

79.1

 

 

 

156.7

 

 

 

162.5

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,278.8

 

 

$

844.0

 

 

$

889.8

 

 

$

645.4

 

 

$

973.0

 

Receivables, net

 

 

93.3

 

 

 

70.3

 

 

 

69.9

 

 

 

83.6

 

 

 

100.3

 

Inventories

 

 

341.2

 

 

 

371.3

 

 

 

332.0

 

 

 

377.7

 

 

 

351.2

 

Total working capital

 

 

953.5

 

 

 

671.0

 

 

 

541.9

 

 

 

518.6

 

 

 

720.8

 

Total assets

 

 

2,895.1

 

 

 

2,565.4

 

 

 

2,477.9

 

 

 

2,355.0

 

 

 

2,471.3

 

Total debt

 

 

2,268.1

 

 

 

1,447.9

 

 

 

1,622.0

 

 

 

1,791.8

 

 

 

928.9

 

Shareholders’ (deficit) equity(4)

 

 

(334.7

)

 

 

196.3

 

 

 

(53.5

)

 

 

(334.4

)

 

 

551.4

 

Cash dividends per common share

 

 

 

 

 

 

 

 

 

 

 

0.30

 

 

 

1.20

 

   
Year Ended December 31,
 
   
2020
  
2019
  
2018
  
2017
  
2016
 
   
(in millions, except per share amounts)
 
Income statement data:
      
Net sales
  $5,541.8  $4,877.1  $4,891.8  $4,427.7  $4,488.4 
Cost of sales
   1,150.6   958.0   919.3   848.6   854.6 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross profit
   4,391.2   3,919.1   3,972.5   3,579.1   3,633.8 
Royalty overrides
   1,690.1   1,448.2   1,364.0   1,254.2   1,272.6 
Selling, general, and administrative expenses
   2,075.0   1,940.3   1,955.2   1,758.6   1,966.9 
Other operating income
   (14.5  (37.5  (29.8  (50.8  (63.8
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating income
   640.6   568.1   683.1   617.1   458.1 
Interest expense, net
   124.2   132.4   161.6   146.3   93.4 
Other expense (income), net
   —     (15.7  57.3   (0.4  —   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income before income taxes
   516.4   451.4   464.2   471.2   364.7 
Income taxes(1)
   143.8   140.4   167.6   257.3   104.7 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
  $372.6  $311.0  $296.6  $213.9  $260.0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Earnings per share:
      
Basic
  $2.83  $2.26  $2.12  $1.35  $1.57 
Diluted
  $2.77  $2.20  $1.98  $1.29  $1.51 
Weighted-average shares outstanding:
      
Basic
   131.5   137.4   140.2   158.5   166.1 
Diluted
   134.5   141.6   149.5   165.7   172.2 
Other financial data:
      
Net cash provided (used) by:
      
Operating activities
   628.6   457.5   648.4   590.8   367.3 
Investing activities
   (123.2  (108.0  (83.9  (95.2  (142.4
Financing activities
   (320.9  (713.0  (593.1  (85.2  (252.3
Depreciation and amortization
   100.3   97.7   100.4   99.8   98.3 
Capital expenditures(2)
   116.8   110.2   88.2   95.1   144.3 
Balance sheet data:
      
Cash and cash equivalents
  $1,045.4  $839.4  $1,198.9  $1,278.8  $844.0 
Receivables, net of allowance for doubtful accounts
   83.3   79.7   70.5   93.3   70.3 
Inventories
   501.4   436.2   381.8   341.2   371.3 
Working capital
   648.5   523.8   216.2   953.5   671.0 
Total assets
   3,076.1   2,678.6   2,789.8   2,895.1   2,565.4 
Total debt
   2,428.4   1,803.0   2,453.8   2,268.1   1,447.9 
Total shareholders’ (deficit) equity(3)
   (856.1  (390.0  (723.4  (334.7  196.3 
Dividends declared per share
  $—    $—    $—    $—    $—   

(1)

Income taxes for the yearyears ended December 31, 2018 and 2017 include the impact of the U.S. Tax Reform enacted during the fourth quarter of 2017, as described further in Note 12,
Income Taxes
, to the Consolidated Financial Statements.

Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K.

(2)

Retail value represents the suggested retail price of products we sell to our Members and is the gross sales amount reflected on our invoices. Retail value is not a measure in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, which may not be comparable to similarly-titled measures used by other companies. This is not the price paid to us by our Members. Our Members purchase product from us at a discount from the suggested retail price. We refer to these discounts as “distributor allowance”, and we refer to retail value less distributor allowances as “product sales”.


Retail value data as a Non-GAAP measure is discussed in greater detail in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations. We discuss retail value because of its fundamental role in our systems, internal controls and operations, and its correlation to Member discounts and Royalty Overrides. In addition, retail value is a component of the financial reports we use to analyze our financial results because, among other things, it can provide additional detail and visibility into our net sales results on a Company-wide and a geographic region and product category basis.

The following represents the reconciliation of retail value to net sales for each of the periods set forth above:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

(In millions)

 

Retail value

 

$

7,058.5

 

 

$

7,119.8

 

 

$

6,994.4

 

 

$

7,843.0

 

 

$

7,514.0

 

Distributor allowance

 

 

(2,858.2

)

 

 

(2,875.6

)

 

 

(2,807.9

)

 

 

(3,275.8

)

 

 

(3,313.3

)

Product sales

 

 

4,200.3

 

 

 

4,244.2

 

 

 

4,186.5

 

 

 

4,567.2

 

 

 

4,200.7

 

Shipping & handling revenues

 

 

227.4

 

 

 

244.2

 

 

 

282.5

 

 

 

391.4

 

 

 

624.6

 

Net sales

 

$

4,427.7

 

 

$

4,488.4

 

 

$

4,469.0

 

 

$

4,958.6

 

 

$

4,825.3

 

(3)

Includes accrued capital expenditures. See the Consolidated StatementStatements of Cash Flows included in Part IV, Item 15,

Exhibits, Financial Statement Schedules
, of this Annual Report on Form
10-K
for capital expenditures paid in cash during the years ended December 31, 2017, 2016,2020, 2019, and 2015.

2018.
49

Table of Contents

(4)

(3)

During the year ended December 31, 2020, we did not pay any dividends and we repurchased 18.4 million of our common shares under our share repurchase program at an aggregate cost of approximately $892.1 million through open-market purchases and the modified Dutch auction tender offer that closed in August 2020. During the year ended December 31, 2019, we did not pay any dividends or repurchase any of our common shares through open market purchases. During the year ended December 31, 2018, we did not pay any dividends and we repurchased 11.4 million of our common shares under our share repurchase program at an aggregate cost of approximately $600.3 million through open-market purchases by an indirect wholly-owned subsidiary and the modified Dutch auction tender offer that closed in May 2018. During the year ended December 31, 2017, we did not pay any dividends and we repurchased 11.723.5 million of our common shares under our share repurchase program at an aggregate cost of approximately $795.3 million, inclusive of transaction costs and the issuance of the
non-transferable
contractual contingent value right, or CVR, through open marketopen-market purchases by an indirect wholly-owned subsidiary and the modified Dutch auction tender offer that closed in October 2017. WeDuring the year ended December 31, 2016, we did not pay any dividends or repurchase any of our common shares through open market purchases during the years ended December 31, 2016 and 2015. During the years ended December 31, 2014 and 2013, we paid an aggregate $30.4 million, and $123.1 million in dividends, respectively, and repurchased $1,267.1 million, and $297.4 million of our common shares, respectively, under our share repurchase program through open market purchases and the Forward Transactions.purchases. Our share repurchase programs, the Forward Transactions, the modified Dutch auction tender offer,offers, and the CVR are discussed in greater detail in Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
and Note 8,
Shareholders’ (Deficit) EquityDeficit
, to the Consolidated Financial Statements.

Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K.


Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management
s Discussion and Analysis o
f Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part I, Item 1A,
Risk Factors
; Part II, Item 6,
Selected Financial Data
; and our consolidated financial statements and related notes, each included elsewhere in this Annual Report on
Form 10-K.

This section of this Annual Report on
Form 10-K
generally discusses 2020 and 2019 items and year-over-year comparisons between 2020 and 2019. Discussions of 2018 items and year-over-year comparisons between 2019 and 2018 that are not included in this Annual Report on
Form 10-K
can be found in Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, of our Annual Report on
Form 10-K
for the year ended December 31, 2019, or the
2019 10-K.
Overview
We are a global nutrition company that sells weight management, targeted nutrition, energy, sports, &and fitness, and outer nutrition products to and through independent members, or Members. In China, we sell our products to and through independent service providers sales representatives, and sales officersrepresentatives to customers and preferred customers, as well as through Company-operated retail storesplatforms when necessary. We refer to Members that distribute our products and achieve certain qualification requirements as “sales leaders.”

We pursue our purpose to make the world healthier and happier by providing high quality, science-basedprovide high-quality, science-backed products to Members and their customers who seek a healthy lifestyle and we also offer a business opportunity to those Members who seek additional income. We believe enhanced consumer awareness and demand for our products due to global trends such as the global obesity epidemic, has made our products more relevantincreasing interest in a fit and active lifestyle, living healthier and the rise of entrepreneurship, coupled with the effectiveness of our distribution network, coupled with geographic expansion,personalized selling through a direct sales channel, have been the primary reasons for our success throughout our 38-year operating history.

continued success.

Our products are grouped in four principal categories: weight management; targeted nutrition; energy, sports, &and fitness; and outer nutrition, along with literature, promotional, and promotionalother items. Our products are often sold through a series of related products and literature designed to simplify weight management and nutrition for consumers and maximize our Members’ cross-selling opportunities.

Industry-wide factors that affect us and our competitors include the global obesity epidemic, the aging of the worldwide population and rising public health care costs, which are driving demand for weight management, nutrition and wellness-related products along with the global increase in under employment and unemployment which can affect the recruitment and retention of Members seeking additional income opportunities.

While we continue to monitor the current global financial environment and the impacts of the COVID-19 pandemic, we remain focused on the opportunities and challenges in retailing of our products and enhancing the customer experience, sponsoring and retaining Members, improving Member productivity, further penetrating
50

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existing markets, opening new markets, globalizing successful DistributorDaily Methods of Operation, or DMOs, such as Nutrition Clubs, Fit Clubs, and Weight Loss Challenges, introducing new products and globalizing existing products, developing niche market segments and further investing in our infrastructure.

We report revenue from our six regions:

North America;

Mexico;

We sell our products in six geographic regions:

North America;
Mexico;
South and Central America;

EMEA, which consists of Europe, the Middle East, and Africa;

Asia Pacific (excluding China); and

China

China.

On July 15, 2016, we reached a settlement with the U.S. Federal Trade Commission, or the FTC and entered into a proposed Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment, or the Consent Order, which resolved the FTC’s multi-year investigation of the Company. We are monitoringcontinue to monitor the impact of the Consent Order and our Boardboard of Directors hasdirectors established the Implementation Oversight Committee in connection with the Consent Order, and more recently, our Audit Committee assumed oversight of continued compliance with the Consent Order. The committee hasImplementation Oversight Committee had met and will meet regularly with management to oversee our compliance with the terms of the Consent Order. While we currently do not expect the settlement to have a long-term and materially adverse impact on our business and our Member base, our business and our Member base, particularly in the U.S., may be negatively impacted as we and they adjust to the changes.impacted. The terms of the Consent Order do not change our going to market through direct selling by independent distributors, and compensating those distributors based upon the product they and their sales organization sell. See Part I, Item 1,
Business
, of this Annual Report on
Form 10-K
for further discussion about the Consent Order and Part I, Item 1A,
Risk Factors
, of this Annual Report on
Form 10-K
for a discussion of risks related to the settlement with the FTC.


COVID-19

Pandemic

During March 2020, the World Health Organization declared the outbreak of coronavirus disease 2019, or
COVID-19,
as a pandemic. The outbreak and subsequent global spread of the virus has impacted the general public, companies and state, local and national governments and economies worldwide, as well as global financial markets, and caused unemployment to increase. Public health organizations and international, federal, state and local governments have implemented measures to combat the spread of
COVID-19,
including restrictions on movement such as quarantines,
“stay-at-home”
orders and social distancing ordinances and restricting or prohibiting outright some or all forms of commercial and business activity. These measures, or others that may be implemented in the future, although temporary in nature, may become more restrictive or continue indefinitely.
Our business and operations have been affected by the pandemic in manners and degrees that vary by market and we expect that the effects will extend beyond 2020. For the health and safety of our employees, our Members, and their customers, we implemented temporary access restrictions at many of our physical business locations and locations where Members conduct their business activities, some of which measures continue. Generally, we have been able to satisfy current levels of demand. While demand for our nutritional products continues to be at or above
pre-pandemic
levels and pandemic constraints have been lessened in most markets by the designation of our nutritional business as “essential” or other similar characterization, our operations have been and continue to be disrupted. The most significant impacts we have seen, depending on market, include:
Constrained ability to deliver product to Members and/or have Members pick product up from our access points due to facility closures and other precautionary measures we have implemented;
51

Restrictions or outright prohibitions on
in-person
training and promotional meetings and events for Members that are a key aspect of our business model, such as our annual regional Extravaganzas;
Constrained ability of Members to have
face-to-face
contact with their customers, including at Nutrition Clubs; and
Slowed office operations as many of our employees have limited access to their regular place of employment.
We and our Members have responded to the pandemic and its impacts on our business and theirs by adapting operations and taking a number of proactive measures to mitigate those impacts. The most significant measures include:
Adapting product access to the varying market-specific challenges, including shifting to more home product delivery from Member
pick-up,
and shifting to online or phone orders only from
in-person
ordering;
Enhancing our training and promotion of technological tools offered to support Members’ online operations and accelerating the launch of certain functionalities, such as functions that facilitate our Members’ ability to communicate and transact with Nutrition Club customers;
Members continuing to or increasing the ways they leverage the Internet and social media for customer contact including training, order-taking, and acceptance of payment;
Member-operated Nutrition Clubs adding to or shifting from
on-site
offerings of single servings to
carry-out
and home delivery of single servings, as well as sales of fully packaged products;
Instituting product purchase limitations for certain
in-demand
products to help ensure as many Members and their customers have fair access to these products and to minimize
out-of-stock
conditions; and
Physical changes at our major facilities, such as our manufacturing plants and distribution centers, including
pre-entry
temperature checks, face masks for employees, and plexiglass barriers, and employees working from home where possible rather than at company offices.
We believe our cash on hand as of December 31, 2020 and as of the date of this filing, combined with cash flows from operating activities, is sufficient to meet our foreseeable needs for the next twelve months. We also have access to our revolving credit facility to supplement our cash-generating ability if necessary.
Although we believe that our responsive measures have been effective in limiting the adverse impact of the pandemic on most markets, the ongoing impact of the
COVID-19
pandemic will affect our business, financial condition, and results of operations in future quarters, including their comparability to prior periods. Given the unpredictable, unprecedented, and fluid nature of the pandemic and its economic consequences, we are unable to predict the duration and extent to which the pandemic and its related impacts will impact our business, financial condition, and results of operations. A more detailed discussion of the pandemic’s impact on net sales for 2020 and its expected impact in future periods, as well as the impacts specific to each geographic region, are discussed further in the
Sales by Geographic Region
section below. See Part I, Item 1A,
Risk Factors
, of this Annual Report on
Form 10-K
for a further discussion of risks related to the
COVID-19
pandemic.
Volume Points by Geographic Region

A key
non-financial
measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted-average measure of product sales volume. Volume Points, which are unaffected by exchange rates or price changes, are used by management as a proxy for sales trends because in general, excluding the impact of price changes, an increase in Volume Points in a particular geographic region or country indicates an increase in our local currency net sales while a decrease in Volume Points in a particular geographic
52

region or country indicates a decrease in our local currency net sales. The criteria we use to determine how and when we recognize Volume Points are not identical to our revenue recognition policies under U.S. GAAP. Unlike net sales, which are generally recognized when the product is delivered and both the title and risk and rewards passwhen control passes to the Member, as discussed in greater detail in Note 2,
Basis of Presentation
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K,
we recognize Volume Points when a Member pays for the order, which is generally prior to the product being delivered. Further, the periods in which Volume Points are tracked can vary slightly from the fiscal periods for which we report our results under U.S. GAAP. Therefore, there can be timing differences between the product orders for which net sales are recognized and for which Volume Points are recognized within a given period. However, historically these timing differences generally have been immaterial in the context of using changes in Volume Points as a proxy to explain volume-driven changes in net sales. Management is evaluating our current approach to assigning and maintaining Volume Point values for certain products or markets. Any changes to this approach may have an impact on the use of Volume Points as a proxy for sales trends in future periods.

Currently, the

The specific number of Volume Points assigned to a product, andwhich is generally consistent across all markets, is based on a Volume Point to suggested retail price ratio for similar products. If a product is available in different quantities, the various sizes will have different Volume Point values. In general, once assigned, a Volume Point value is consistent in each region and country and does not change from year to year. The reasonFor strategic reasons, certain Volume Points are usedPoint values were adjusted during 2018 for certain markets in the manner described above is that weNorth America and South and Central America regions. Volume Point adjustments during 2020 and 2019 were not material. We use Volume Points for Member qualification and recognition purposes, as well as a proxy for sales trends, and therefore we attempt togenerally keep Volume Points for a similar or like product consistent on a global basis. However, because Volume Points are a function of value rather than product type or size, they are not a reliable measure for product mix. As an example, an increase in Volume Points in a specific country or region could mean a significant increase in sales of less expensive products or a marginal increase in sales of more expensive products.

 

 

For the Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

% Change

 

 

2016

 

 

2015

 

 

% Change

 

 

 

(Volume Points in millions)

 

North America

 

 

1,099.0

 

 

 

1,248.6

 

 

 

(12.0

)%

 

 

1,248.6

 

 

 

1,156.0

 

 

 

8.0

%

Mexico

 

 

875.4

 

 

 

919.8

 

 

 

(4.8

)%

 

 

919.8

 

 

 

842.9

 

 

 

9.1

%

South & Central America

 

 

593.9

 

 

 

663.0

 

 

 

(10.4

)%

 

 

663.0

 

 

 

768.4

 

 

 

(13.7

)%

EMEA

 

 

1,088.5

 

 

 

1,049.6

 

 

 

3.7

%

 

 

1,049.6

 

 

 

922.3

 

 

 

13.8

%

Asia Pacific (excluding China)

 

 

1,089.2

 

 

 

1,076.4

 

 

 

1.2

%

 

 

1,076.4

 

 

 

1,064.5

 

 

 

1.1

%

China

 

 

633.4

 

 

 

624.7

 

 

 

1.4

%

 

 

624.7

 

 

 

581.6

 

 

 

7.4

%

Worldwide

 

 

5,379.4

 

 

 

5,582.1

 

 

 

(3.6

)%

 

 

5,582.1

 

 

 

5,335.7

 

 

 

4.6

%

   
Year Ended December 31,
 
   
2020
   
2019
   
% Change
  
2019
   
2018
   
% Change
 
   
(Volume Points in millions)
 
North America(1)
   1,735.0    1,317.0    31.7  1,317.0    1,229.4    7.1
Mexico
   879.7    882.8    (0.4)%   882.8    920.5    (4.1)% 
South and Central America(2)
   535.2    516.5    3.6  516.5    561.6    (8.0)% 
EMEA
   1,562.5    1,290.1    21.1  1,290.1    1,219.9    5.8
Asia Pacific
   1,690.2    1,565.0    8.0  1,565.0    1,291.4    21.2
China
   523.8    497.2    5.3  497.2    669.2    (25.7)% 
  
 
 
   
 
 
    
 
 
   
 
 
   
Worldwide(3)
   6,926.4    6,068.6    14.1  6,068.6    5,892.0    3.0
  
 
 
   
 
 
    
 
 
   
 
 
   
(1)
Excluding Volume Point adjustments made during 2018 for certain products in certain markets, the percent change for the year ended December 31, 2019 would have been an increase of 6.2%.
(2)
Excluding Volume Point adjustments made during 2018 for certain products in certain markets, the percent change for the year ended December 31, 2019 would have been a decrease of 8.6%.
(3)
Excluding the Volume Point adjustments made during 2018 for certain products in certain markets in the North America and South and Central America regions noted above, the percent change for the year ended December 31, 2019 would have been an increase of 2.8%.
Volume Points decreased 3.6%increased 14.1% for 20172020, including a mixed impact of
COVID-19
pandemic conditions across our markets, after having increased 4.6%3.0% for 2016. Most significantly,2019. Although pandemic conditions had adverse operational impacts across all markets, we believe our Members in certain markets where we have seen increased net sales and Volume Point growth are more focused on their business, particularly the North America region and certain EMEA markets. Despite our expectation of Volume Point growth in 2021, it is not certain that we will be able to sustain the same rate of Volume Point growth in 2021 compared to that of 2020.
53

We believe North America’s Volume Point increase for 2020, which was well above the increase for the prior year, reflects the continuing success and expansion of our Distributors as supported by our product line expansion and technological tools, as well as targeted communications and promotions. We believe Mexico’s slight decrease for the year, after a somewhat larger decrease for the prior year, reflects continuing difficult economic conditions for the market, offset somewhat in the second half of the year by our program of promotions to encourage Member sponsorship and activity. After some years of declines, the South and Central America region saw an increase in Volume Points for 2020 despite pandemic-related continuing declines in several markets including Brazil, as we believe efforts to build more sustainable business for our Members through a focus on daily product consumption and retailing take hold in certain markets in the region. EMEA saw increased Volume Point growth for 2016, the North America region decreased, reflecting whatyear versus 2019, a result we believe to be a transitionary impact of customer-oriented efforts including Member focus on the Consent Order implementation actions,training, brand awareness, and product line expansion, as well as strong business momentum including training on new tools and methods for documenting sales and time spent to then train their sales organizations.Member recruitment. The MexicoAsia Pacific region also saw a Volume Point decline after a previousincreases for the year, increase, attributable in part to a difficult economic environment. The EMEA and China regions saw lower rates of Volume Point increase for 2017 versus 2016 due to region and country-specific reasons, which are discussed below. The South & Central America region saw a continuing though lesser, decline in Volume Points for 2017, generally as marketsfavorable long-term trends seen in the region, although the growth rate was below that seen in 2019 due to the adverse impact of pandemic conditions in the region, especially in India and South Korea. China achieved Volume Point increases for the year, compared to a decline for 2019 which was weakened by disruption from the Chinese government’s
100-day
review, concluded in April 2019, of the health product industry. China saw year-over-year Volume Point declines in the latter part of the year. Across most markets, we expect
COVID-19
pandemic conditions to continue to transitionimpact Volume Point results; however, we are unable to sustainable, customer-oriented business practices. The Asia Pacific (excluding China) region continued to see mixed results across its markets.predict the duration or magnitude of these effects. Results and more regional or country-specific impacts of the
COVID-19
pandemic are discussed further below in the applicable sections of
Sales by Geographic Region.

Region

.
Presentation

Retail value”
Net sales
represents the suggested retail price of products we sellproduct sales to our Members, net of
distributor allowances
, and is the gross sales amount reflected on our invoices. Retail value is a Non-GAAP measure which may not be comparable to similarly-titled measures used by other companies. This is not the price paid to us by our Members. inclusive of any shipping and handling revenues, as described further below.
Our Members purchase product from us at a discount from the suggested retail price. We refer to these discounts as “distributor allowance,” and we refer to retail value less distributor allowances as “product sales.


Total distributor allowances for 2017, 2016, and 2015 were 40.5%, 40.4%, and 40.1% of retail value, respectively. Distributor allowances and Marketing Plan payouts generally utilize 90% to 95% of suggested retail price, depending on the product and market,less discounts referred to which we apply discounts of up to 50% for as “

distributor allowances and payout rates of up to 15% for royalty overrides, up to 7% for production bonuses, and approximately 1% for the Mark Hughes bonus. Distributor allowances as a percentage of retail value may vary by country depending upon regulatory restrictions that limit or otherwise restrict distributor allowances. We also offer reduced distributor allowances with respect to certain products worldwide.allowance
.” Each Member’s level of discount is determined by qualification based on their volume of purchases. In cases where a Member has qualified for less than the maximum discount, the remaining discount, which we also refer to as a wholesale commission, is received by their sponsoring Members. Therefore,Distributor allowances may also vary by country depending upon regulatory restrictions that limit or otherwise restrict distributor allowances. We also offer reduced distributor allowances with respect to certain products worldwide.
For U.S. GAAP purposes, shipping and handling services relating to product sales are recognized as fulfillment activities on our performance obligation to transfer products and are therefore recorded within net sales as part of product returnssales and distributor allowances.

Netare not considered as separate revenues.

In certain geographic markets, we have introduced segmentation of our Member base into two categories: “preferred members” – who are simply consumers who wish to purchase product for their own household use, and “distributors” – who are Members who also wish to resell products or build a sales” equal product sales plus “ organization. Additionally, in certain markets we are simplifying our pricing by eliminating certain shipping and handling revenues”,charges and generally represents whatrecovering those costs within suggested retail price. As we collect.

We do not have visibility into allcontinue to extend the segmentation of the sales fromour distributors and preferred members to additional geographic markets and consider other pricing simplification efforts for our Members, to their customers, but such a figure would differ from our reported “retail value” by factors including (a) the amountutility of, product purchased by our Members for their own personal consumption and (b) prices charged by our Members to their customers other than our suggested retail prices. We discusstherefore management’s reliance on, total retail value becausehas decreased and we are discontinuing the disclosure of its fundamental role in our systems, internal controls and operations, and its correlation to Member discounts and Royalty Overrides. In addition, this

non-GAAP
retail value is a component of the financial reports we use to analyze our financial results because, among other things, it can provide additional detail and visibility into our net sales results on a Company-wide and a geographic region and product category basis. Therefore, this non-GAAP measure may be useful to investors because it provides investors with the same information used by management. As this measure is not in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, retail value should not be considered in isolation from, nor as a substitute for, net sales and other consolidated income or cash flow statement data prepared in accordance with U.S. GAAP, or as a measure of profitability or liquidity. A reconciliation of retail value to net sales is presented below under Results of Operations.

information.

Our international operations have provided and will continue to provide a significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we also compare the percent change in net sales from one period to another period using “
net sales in local currency
.. Net sales in local currency is not a U.S. GAAP financial measure. Net
54

sales in local currency removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the local currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. We believe presenting net sales in local currency is useful to investors because it allows a meaningful comparison of net sales of our foreign operations from period to period. However, net sales in local currency measures should not be considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP.

Additionally, the impact of foreign currency fluctuations in Venezuela and the price increases we implement as a result of the highly inflationary economy in that market can each, when considered in isolation, have a disproportionately large impact to our consolidated results despite the offsetting nature of these drivers and that net sales in Venezuela, which represent less than 1% of our consolidated net sales, are not material to our consolidated results. Therefore, in certain instances, we believe it is helpful to provide additional information with respect to these factors as reported and excluding the impact of Venezuela to illustrate the disproportionate nature of Venezuela’s individual pricing and foreign exchange impact to our consolidated results. However, excluding the impact of Venezuela from these measures is not in accordance with U.S. GAAP and should not be considered in isolation or as an alternative to the presentation and discussion thereof calculated in accordance with U.S. GAAP.
Our “
gross profit
” consists of net sales less “
cost of sales
,, which represents our manufacturing costs, the price we pay to our raw material suppliers and manufacturers of our products as well as shipping and handling costs including duties, tariffs, and similar expenses.

While certain Members may profit from their activities by reselling our products for amounts greater than the prices they pay us, Members that develop, retain, and manage other Members may earn additional compensation for those activities, which we refer to as “
Royalty overrides
.. Royalty overrides are our most significant operating expense and consist of:

royalty overrides and production bonuses;

the Mark Hughes bonus payable to some of our most senior Members; and

other discretionary incentive cash bonuses to qualifying Members.

Royalty overrides are compensation to Members for the development, retention and improved productivity of their sales organizations and are paid to several levels of Members on each sale. Royalty overrides are compensation for services rendered to us and, as such, are recorded as an operating expense.

In China, our independent service providers are compensated for marketing, sales support, and other services instead of the distributor allowances and royalty overrides utilized in our global marketing plan.Marketing Plan. Service fees to China independent service providers are included in selling, general, and administrative expenses.


Because of local country regulatory constraints, we may be required to modify our Member incentive plans as described above. We also pay reduced royalty overrides with respect to certain products worldwide. Consequently, the total royaltyRoyalty override percentage may vary over time and from the percentages noted above.

time.

Our “
contribution margins
” consist of net sales less cost of sales and royaltyRoyalty overrides.

Selling, general, and administrative expenses
” represent our operating expenses, which include labor and benefits, service fees to China independent service providers, sales events, professional fees, travel and entertainment, Member promotions, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses, and other miscellaneous operating expenses.

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Our “
other operating income
” consists of government grant income related to China and the arbitration award finalization of insurance recoveries in connection with the re-auditflooding at one of our 2010 to 2012 financial statements after the resignation of KPMG as our independent registered public accounting firm.

warehouses in Mexico during September 2017.

Our
“other (income) expense (income), net”
consists of
non-operating
income and expenses such as impairmentsgains or losses on extinguishment of available-for-sale investmentsdebt and gains or losses due to subsequent changes in the fair value of the CVR.
non-transferable
contractual contingent value right, or CVR, provided for each share tendered in the October 2017 modified Dutch auction tender offer. See Note 8,
Shareholders’ (Deficit) EquityDeficit
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for further information on the CVR.

Most of our sales to Members outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate foreign currency losses on intercompany transactions. Foreign currency exchange rates can fluctuate significantly. From time to time, we enter into foreign currency derivatives to partially mitigate our foreign currency exchange risk as discussed in further detail in Part II, Item 7A,
Quantitative and Qualitative Disclosures about Market Risk.

, of this Annual Report on
Form 10-K.
Results of Operations

Our results of operations for the periods below are not necessarily indicative of results of operations for future periods, which depend upon numerous factors, including our ability to sponsor Members and retain sales leaders, further penetrate existing markets, introduce new products and programs that will help our Members increase their retail efforts and develop niche market segments.

The following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated:

 

 

Year Ended

December 31,

2017

 

 

Year Ended

December 31,

2016

 

 

Year Ended

December 31,

2015

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of sales

 

 

19.2

 

 

 

19.0

 

 

 

19.1

 

Gross profit

 

 

80.8

 

 

 

81.0

 

 

 

80.9

 

Royalty overrides(1)

 

 

28.3

 

 

 

28.4

 

 

 

28.0

 

Selling, general and administrative expenses(1)

 

 

39.7

 

 

 

43.8

 

 

 

39.9

 

Other operating income

 

 

(1.1

)

 

 

(1.4

)

 

 

(0.1

)

Operating income

 

 

13.9

 

 

 

10.2

 

 

 

13.1

 

Interest expense

 

 

3.6

 

 

 

2.2

 

 

 

2.2

 

Interest income

 

 

0.3

 

 

 

0.1

 

 

 

0.1

 

Other expense, net

 

 

 

 

 

 

 

 

0.1

 

Income before income taxes

 

 

10.6

 

 

 

8.1

 

 

 

10.9

 

Income taxes

 

 

5.8

 

 

 

2.3

 

 

 

3.3

 

Net income

 

 

4.8

%

 

 

5.8

%

 

 

7.6

%

   
Year Ended December 31,
 
   
2020
  
2019
  
2018
 
Operations:
    
Net sales
   100.0  100.0  100.0
Cost of sales
   20.8   19.6   18.8 
  
 
 
  
 
 
  
 
 
 
Gross profit
   79.2   80.4   81.2 
Royalty overrides(1)
   30.5   29.7   27.9 
Selling, general, and administrative expenses(1)
   37.4   39.8   39.9 
Other operating income
   (0.3  (0.8  (0.6
  
 
 
  
 
 
  
 
 
 
Operating income
   11.6   11.7   14.0 
Interest expense
   2.5   3.1   3.7 
Interest income
   0.2   0.4   0.4 
Other expense (income), net
   —     (0.3  1.2 
  
 
 
  
 
 
  
 
 
 
Income before income taxes
   9.3   9.3   9.5 
Income taxes
   2.6   2.9   3.4 
  
 
 
  
 
 
  
 
 
 
Net income
   6.7  6.4  6.1
  
 
 
  
 
 
  
 
 
 

(1)

Service fees to our independent service providers in China are included in selling, general, and administrative expenses while Member compensation for all other countries is included in royaltyRoyalty overrides.


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Changes in net sales are directly associated with the retailing of our products, recruitment of new Members, and retention of sales leaders. Our strategies involve providing quality products, improved DMOs, including daily consumption approaches such as Nutrition Clubs, easier access to product, systemized training and education of Members on our products and methods, and continued promotion and branding of Herbalife products.

Management’s role,
in-country
and at the region and corporate level, is to provide Members with a competitive, broad, and broadinnovative product line, offer leading-edge business tools and technology services, and encourage strong teamwork and Member leadership and offer leading edge business tools and technology services to make doing business with Herbalife simple. Management uses the Marketing Plan, which reflects the rules for our global network marketing organization that specify the qualification requirements and general compensation structure for Members, coupled with educational and motivational tools and promotions to encourage Members to increase retailing, retention, and recruiting, which in turn affect net sales. Such tools include sales events such as Extravaganzas, Leadership Development Weekends and World Team Schools where large groups of Members gather, thus allowing them to network with other Members, learn retailing, retention, and recruiting techniques from our leading Members and become more familiar with how to market and sell our products and business opportunities. Accordingly, management believes that these development and motivation programs increase the productivity of the sales leader network. The expenses for such programs are included in selling, general, and administrative expenses. We also use event and
non-event
product promotions to motivate Members to increase retailing, retention, and recruiting activities. These promotions have prizes ranging from qualifying for events to product prizes and vacations. A program that we have seen success with and begun to use on a broad basisin many markets is the Member Activation Program, under which new Members, who order a modest number of Volume Points in each of their first three months, earn a prize. Our objective is to improve the quality of sales leaders by encouraging new Members to begin acquiring retail customers before attempting to qualify for sales leader status. The costsAdditionally, in certain markets we have begun to utilize the segmentation of our Member base into “preferred members” and “distributors” for more targeted and efficient communication and promotions for these programs are included in selling, generaltwo differently motivated types of Members. In certain other markets that have not been segmented, we have begun using Member data to similarly categorize Members for communication and administrative expenses.

promotion efforts.

DMOs are being generated in many of our markets and are globalized where applicable through the combined efforts of Members and country, regional and corporate management. While we support a number of different DMOs, one of the most popular DMOs is the daily consumption DMO. Under our traditional DMO, a Member typically sells to its customers on a somewhat infrequent basis (e.g., monthly) which provides fewer opportunities for interaction with their customers. Under a daily consumption DMO, a Member interacts with its customers on a more frequent basis, including such activities as weekly
weigh-ins,
which enables the Member to better educate and advise customers about nutrition and the proper use of the products and helps promote daily usage as well, thereby helping the Member grow his or her business. Specific examples of DMOs include the Nutrition Club concept in Mexico, the Healthy Breakfast concept in Russia, and the Internet/Sampling and Weight Loss Challenge in the United States. Management’s strategy is to review the applicability of expanding successful country initiatives throughout a region, and where appropriate, support the globalization of these initiatives.

As discussed further by market in the
Sales by Geographic Region
below, the Company has responded to
COVID-19
pandemic conditions by adapting how it communicates with, services, and transacts with our Members and our Members have similarly adapted their DMOs and other activities. These responsive actions have varied by region and by market due to the differing market- and regional-specific impacts of the pandemic and the conditions and challenges unique to a particular market or region independent of the impacts of the pandemic.
The factors described above help Members increase their business, which in turn helps drive Volume Point growth in our business, and thus, net sales growth. The discussion below of net sales details some of the specific drivers of changes in our business and causes of sales fluctuations during the year ended December 31, 20172020 as
57

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compared to the same period in 2016 and during the year ended December 31, 2016 as compared to the same period in 2015,2019, as well as the unique growth or contraction factors specific to certain geographic regions or significant countries within a region during these periods. Net sales fluctuations, both Company-wide and within a particular geographic region or country, are primarily the result of changes in volume, changes in prices, and/or changes in foreign currency translation rates. The discussion of changes in net sales quantifies the impact of those drivers that are quantifiable such as changes in foreign currency translation rates, and cites the estimated impact of any significant price changes. The remaining drivers, which management believes are the primary drivers of changes in volume, are typically qualitative factors whose impact cannot be quantified. We use Volume Points as an indication for changes in sales volume. Management is evaluating
We expect the impact of the
COVID-19
pandemic to impact our current approachresults of operations in future quarters and their comparability to assigningprior periods, both on a consolidated basis and maintaining Volume Point values for certain products or markets. Any changesat the regional level. However, given the unpredictable, unprecedented, and fluid nature of the pandemic and its economic consequences, we are unable to this approachpredict the extent to which the pandemic and its related impacts will adversely impact our business, financial condition, and results of operations, including the impact it may have anon our regions and individual markets. See the
Sales by Geographic Region
below for a more detailed discussion of the pandemic’s impact on net sales for the use of Volume Points as a proxyyear for sales trends in future periods.

each geographic region and individual market.

Financial Results for the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Net sales were $5,541.8 million for the year ended December 31, 2017 compared to the year ended December 31, 2016

2020. Net sales increased $664.7 million, or 13.6% ($664.6 million, or 13.6% excluding Venezuela), for the year ended December 31, 2017 decreased 1.4% to $4,427.7 million as compared to $4,488.4 million in 2016. In local currency, net sales for the year ended December 31, 2017 decreased 1.1%2020 as compared to the same period in 2016.2019. In local currency, net sales increased 17.5% (16.6% excluding Venezuela) for the year ended December 31, 2020 as compared to the same period in 2019. The decrease13.6% increase in net sales for the year ended December 31, 20172020 was primarily the result of a decreasedriven by an increase in sales volume, as indicated by a decrease14.1% increase in Volume Points, and an unfavorable change in country sales mix, which reduced net sales bya 3.6% and 1.1%, respectively, partially offset by thefavorable impact of price increases which increased(2.7% favorable impact excluding Venezuela), partially offset by a 3.8% unfavorable impact of fluctuations in foreign currency rates (2.9% unfavorable impact excluding Venezuela). As described in the

Sales by Geographic Region
section below, despite our expectation of net sales growth in 2021, it is not certain that we will sustain the same rate of net sales growth in 2021 compared to that of 2020.
Net income was $372.6 million, or $2.77 per diluted share, for the year ended December 31, 2020. Net income increased $61.6 million, or 19.8%, for the year ended December 31, 2020 as compared to the same period in 2019. The increase in net income for the year ended December 31, 2020 was mainly due to $230.2 million higher contribution margin driven by approximately 3.0%.

higher net sales and $8.2 million lower interest expense, net; partially offset by $134.7 million higher selling, general, and administrative expenses primarily driven by $84.1 million in higher labor and benefits costs and $43.1 million in higher expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China (See Note 7,

Contingencies

, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K);
$17.0 million lower China government grant income; and a $15.7 million unfavorable impact from other expense (income), net relating to CVR revaluations in 2019 as described below.
Net income for the year ended December 31, 2017 decreased 17.7%2020 included a $85.9 million unfavorable impact ($85.4 million
post-tax)
from expenses related to $213.9regulatory inquiries and a legal accrual, which includes $83.1 million or $2.58 per diluted share, compared to $260.0 million, or $3.02 per diluted share, for the same period in 2016. The decrease for the year ended December 31, 2017 was primarily dueof expenses relating to the decline in sales as discussed above; the $29.7 million arbitration award in 2016 relatedSEC and DOJ investigations relating to the re-audit; higher FCPA matter in China; a $21.8 million unfavorable impact of
non-cash
interest expense related to the new Credit Facility; and higher income taxes primarily due to the $153.3 million provisional net expense related to the U.S. Tax Reform2024 Convertible Notes (See Note 12,
Income Taxes5,
Long-Term Debt
, to the Consolidated Financial Statements)Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K); partially offset by
a $21.2 million
pre-tax
unfavorable impact ($19.2 million
post-tax)
from expenses related to the
COVID-19
pandemic, and such expenses are expected to continue in future periods; and a $0.5 million
pre-tax
unfavorable impact ($0.4 million
post-tax)
of debt issuance costs related to the $203.0 million regulatory settlements in 2016; and higher government grant income in China.

amendment of our 2018 Credit Facility.

Net income for the year ended December 31, 20172019 included a $50.8$75.5 million
pre-tax favorable
unfavorable impact ($36.274.1 million
post-tax)
from expenses related to regulatory inquiries, the SEC investigation relating to our
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Table of government grant incomeContents
disclosures regarding our marketing plan in China (See Note 7,
Contingencies
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K),
and the SEC and DOJ investigations relating to the FCPA matter in China; a $47.7$38.2 million unfavorable impact of
non-cash
interest expense related to the 2019 Convertible Notes, 2024 Convertible Notes, and the Forward Transactions (See Note 4, 5,
Long-Term Debt
, to the Consolidated Financial Statements)Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K);
a $13.7$19.0 million
pre-tax
unfavorable impact ($9.017.2 million
post-tax) from expenses related to regulatory inquiries;
of an accrual for Mexico VAT assessments; a $5.0$1.2 million
pre-tax
unfavorable impact ($3.80.9 million
post-tax) related to legal, advisory services and other expenses for our response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); a $17.7 million pre-tax unfavorable impact ($11.7 million post-tax)
of debt issuance costs related to the implementationamendment of the Consent Order, comprised of $14.7 million of legal, advisory, and other expenses and $3.0 million of product discounts related to preferred member conversions;our 2018 Term Loan B; a $153.3 million unfavorable impact of the provisional net expense related to the U.S. Tax Reform (See Note 12, Income Taxes, to the Consolidated Financial Statements); and a $0.4$15.7 million favorable impact of the gain on the revaluation of the CVR provided to the participants of the modified Dutch auction tender offer (See Note 8,
Shareholders’ (Deficit) EquityDeficit
, to the Consolidated Financial Statements).

Net incomeStatements included in Part IV, Item 15,

Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K);
and a $6.0 million
pre-tax
favorable impact ($5.9 million
post-tax)
related to the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7,
Contingencies
, to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 included a $203.0 million pre-tax unfavorable impact ($133.0 million post-tax) related to regulatory settlements; a $34.2 million pre-tax favorable impact ($24.3 million post-tax) of government grant income in China; a $29.7 million pre-tax favorable impact ($25.8 million post-tax) related to2018, or the arbitration award in connection with the re-audit; a $45.1 million unfavorable impact of non-cash interest expense related to the Convertible Notes and the Forward Transactions (See Note 4, Long-Term Debt, to the Consolidated Financial Statements); a $16.3 million pre-tax unfavorable impact ($10.8 million post-tax) from expenses related to regulatory inquiries; a $12.1 million pre-tax unfavorable impact ($9.0 million post-tax) related to legal, advisory services and other expenses for our response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); a $3.6 million pre-tax unfavorable impact ($2.6 million post-tax) related to expenses incurred for the recovery of costs associated with the re-audit of our 2010 to 2012 financial statements after the resignation of KPMG as our independent registered public accounting firm; and a $10.7 million pre-tax unfavorable impact ($7.1 million post-tax) related to the implementation of the Consent Order, comprised of $9.0 million of legal, advisory, and other expenses and $1.7 million of product discounts related to preferred member conversions.

2018 10-K).
Reporting Segment Results

We aggregate our operating segments, excluding China, into a reporting segment, or the Primary Reporting Segment. The Primary Reporting Segment includes the North America, Mexico, South &and Central America, EMEA, and Asia Pacific regions. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. See Note 10,
Segment Information
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for further discussion of our reporting segments. See below for discussions of net sales and contribution margin by our reporting segments.

Net Sales by Reporting Segment

The Primary Reporting Segment reported net sales of $3,541.8$4,732.2 million for the year ended December 31, 2017. Net sales for the Primary Reporting Segment decreased $77.82020, representing an increase of $607.1 million, or 2.1%14.7% ($606.9 million, or 14.7% excluding Venezuela), for the year ended December 31, 2017, as compared to the same period in 2016.2019. In local currency, net sales decreased 2.4%increased 19.2% (18.2% excluding Venezuela) for the year ended December 31, 20172020 as compared to the same period in 2016 for the Primary Reporting Segment.2019. The decrease14.7% increase in net sales for the year ended December 31, 20172020 was primarily the result of a decreasedue to an increase in sales volume, as indicated by a decrease14.9% increase in Volume Points, and an unfavorable change in country sales mix, which reduced net sales by 4.3% and 1.5%, respectively, partially offset by thea 4.2% favorable impact of price increases which increased net sales(3.1% favorable impact excluding Venezuela); partially offset by approximately 3.0%a 4.5% unfavorable impact of fluctuations in foreign currency exchange rates (3.4% unfavorable impact excluding Venezuela).

For a discussion of China’s net sales for the year ended December 31, 2017,2020 as compared to the same period in 2016,2019, see the China section of the
Sales by Geographic Region
below.


Contribution Margin by Reporting Segment

As discussed above under “Presentation,” contribution margin consists of net sales less cost of sales and Royalty overrides.
The Primary Reporting Segment reported contribution margin of $1,534.2$1,983.6 million, or 41.9% of net sales, for the year ended December 31, 2020, representing an increase of $190.0 million, or 10.6% ($189.3 million, or 10.5% excluding Venezuela), as compared to the same period in 2019. The 10.6% increase in contribution margin for the year ended December 31, 2020 was primarily the result of a 14.9% favorable impact of volume increases and a 6.5% favorable impact of price increases (4.9% favorable impact excluding Venezuela); partially offset by a 5.9% unfavorable impact of fluctuations in foreign currency exchange rates (4.2% unfavorable impact excluding Venezuela) and a 3.2% unfavorable impact of other cost changes related to self-manufacturing and sourcing and increased freight costs from orders shifting toward home delivery versus Member
pick-up.
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China reported contribution margin of $717.5 million for the year ended December 31, 2017. Contribution margin for the Primary Reporting Segment decreased $37.72020, representing an increase of $40.2 million, or 2.4%5.9%, for the year ended December 31, 2017, as compared to the same period in 2016.2019. The 2.4% decrease5.9% increase in contribution margin for the year ended December 31, 20172020 was primarily the result of volume decreases, as indicated by a decrease in Volume Points, and unfavorable country sales mix, which reduced contribution margin by 4.0% and 4.4%, respectively; partially offset by the5.3% favorable impact of price increases and cost savings through strategic sourcing and self-manufacturing, which increased contribution margin by approximately 4.6% and 1.0%, respectively.

China reported contribution margin of $790.7 million for the year ended December 31, 2017. Contribution margin for China was relatively flat compared to the same period in 2016 and was primarily the result of price increases, which increased contribution margin by approximately 3.6%, partially offset by the unfavorable impact of fluctuations in foreign currency rates, which reduced contribution margin by approximately 2.9%.

volume increases.

Sales by Geographic Region

The following chart reconciles retail value to net

Net sales by geographic region:

region were as follows:

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

Retail

Value(1)

 

 

Distributor

Allowance

 

 

Product

Sales

 

 

Shipping &

Handling

Revenues

 

 

Net

Sales

 

 

Retail

Value(1)

 

 

Distributor

Allowance

 

 

Product

Sales

 

 

Shipping &

Handling

Revenues

 

 

Net

Sales

 

 

Change

in Net

Sales

 

 

 

(Dollars in millions)

 

North America

 

$

1,400.8

 

 

$

(642.3

)

 

$

758.5

 

 

$

81.7

 

 

$

840.2

 

 

$

1,587.0

 

 

$

(721.3

)

 

$

865.7

 

 

$

90.0

 

 

$

955.7

 

 

 

(12.1

)%

Mexico

 

 

762.8

 

 

 

(346.9

)

 

 

415.9

 

 

 

26.8

 

 

 

442.7

 

 

 

767.2

 

 

 

(347.6

)

 

 

419.6

 

 

 

27.0

 

 

 

446.6

 

 

 

(0.9

)%

South & Central America

 

 

827.1

 

 

 

(385.0

)

 

 

442.1

 

 

 

32.2

 

 

 

474.3

 

 

 

848.2

 

 

 

(393.5

)

 

 

454.7

 

 

 

34.0

 

 

 

488.7

 

 

 

(2.9

)%

EMEA

 

 

1,498.0

 

 

 

(681.8

)

 

 

816.2

 

 

 

52.5

 

 

 

868.7

 

 

 

1,398.9

 

 

 

(633.9

)

 

 

765.0

 

 

 

50.6

 

 

 

815.6

 

 

 

6.5

%

Asia Pacific

 

 

1,565.3

 

 

 

(679.0

)

 

 

886.3

 

 

 

29.6

 

 

 

915.9

 

 

 

1,531.9

 

 

 

(656.9

)

 

 

875.0

 

 

 

38.0

 

 

 

913.0

 

 

 

0.3

%

China

 

 

1,004.5

 

 

 

(123.2

)

 

 

881.3

 

 

 

4.6

 

 

 

885.9

 

 

 

986.6

 

 

 

(122.4

)

 

 

864.2

 

 

 

4.6

 

 

 

868.8

 

 

 

2.0

%

Worldwide

 

$

7,058.5

 

 

$

(2,858.2

)

 

$

4,200.3

 

 

$

227.4

 

 

$

4,427.7

 

 

$

7,119.8

 

 

$

(2,875.6

)

 

$

4,244.2

 

 

$

244.2

 

 

$

4,488.4

 

 

 

(1.4

)%

   
Year Ended December 31,
   
2020
  
2019
  
% Change
      
(Dollars in millions)
   
North America
   $1,372.9   $1,025.5    33.9%
Mexico
    436.9    473.6    (7.7)%
South and Central America
    366.4    379.0    (3.3)%
EMEA
    1,208.3    998.0    21.1%
Asia Pacific
    1,347.7    1,249.0    7.9%
China
    809.6    752.0    7.7%
   
 
 
    
 
 
    
Worldwide
   $5,541.8   $4,877.1    13.6%
   
 
 
    
 
 
    

(1)

Retail value is a Non-GAAP measure which may not be comparable to similarly-titled measures used by other companies. See “Presentation” above for a discussion of how we calculate retail value and why we believe the measure is useful to investors.

North America

The North America region reported net sales of $840.2$1,372.9 million for the year ended December 31, 2017.2020. Net sales decreased $115.5increased $347.4 million, or 12.1%33.9%, for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. In local currency, net sales decreased by the same 12.1%increased 33.9% for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. The 33.9% increase in net sales for the year ended December 31, 2020 was primarily due to an increase in sales volume, as indicated by a 31.7% increase in Volume Points, and a 2.9% favorable impact of price increases.
Net sales in the U.S. were $1,334.5 million for the year ended December 31, 2020. Net sales increased $331.9 million, or 33.1%, for the year ended December 31, 2020 as compared to the same period in 2019.
Growth in the region continues to be supported by product line expansion and deployment of enhanced technology tools to support our distributors’ businesses and optimize their customers’ experiences with Herbalife. The number of active Nutrition Clubs in the region has continued to grow and the Nutrition Club DMO is a focus area for training and technological support of our Members. Our communications, promotions, and other operations in the region are targeted to our distributors, or their preferred members or retail customers as appropriate. Our promotional program is designed to encourage consistency and sustainability in our Members’ businesses. Strengthened momentum, including increased Membership, for the market has resulted in a higher rate of growth in net sales for 2020 compared to that for 2019.
In response to pandemic conditions, product distribution to our Members was altered to allow online and
phone-in
orders only; our two major U.S. distribution centers were shipping product only, with no
in-person
pick-ups
permitted; and our sales centers were for
pick-up
only, with no orders taken
on-site
as of yet; however, our Members’ ability to obtain product has not materially decreased. Late in the third quarter, our Memphis distribution center began allowing
pick-up
orders; however, we continue to not allow
in-person
orders at any of our sales centers. Members’ Nutrition Clubs, which represent a major DMO for the region, are operating in some areas as
pick-up
points for product only versus their more traditional
on-site
consumption approach. Nutrition Club sales volume increased versus the prior year, including the impact of home deliveries from Nutrition Clubs to their customers, an approach that has seen increased use as a response to the pandemic. Our Member training and promotion events, such as our Success Training Seminars and our Leadership Development Weekends, have shifted to a “virtual” online approach. Promotional activities aimed at our Members continue, though prizes that have involved travel to events have shifted to cash and other awards.
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As evidenced by continuing Volume Point growth for the region, we believe that our responsive efforts to pandemic conditions have been effective to date and we believe that pandemic conditions may have been a contributing factor in the motivation and focus of our Members. Certain modified practices by us and our Members may prove to be lasting improvements, such as an increased focus on customer-direct orders, and events and trainings that are offered virtually as well as
in-person.
Mexico
The Mexico region reported net sales of $436.9 million for the year ended December 31, 2020. Net sales decreased $36.7 million, or 7.7%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 2.2% for the year ended December 31, 2020 as compared to the same period in 2019. The 7.7% decrease in net sales for the year ended December 31, 2017, as compared to the same period in 2016, was a result of a net sales decrease in the U.S. of $116.7 million, or 12.5%. The 12.1% decrease in net sales for the North America region2020 was primarily the resultdue to a 9.9% unfavorable impact of fluctuations in foreign currency exchange rates and a decrease in sales volume, as indicated by a 12.0%0.4% decrease in Volume Points.

As partPoints, partially offset by a 3.0% favorable impact of the Consent Order, we have implemented certain new procedures and enhanced certain existing procedures in the United States. price increases.

We believe North America’sthe Volume Point decreasesdecrease for the year ended December 31, 2017, versus an increasereflects difficult economic conditions in the region and a consequent slowing of our business momentum for 2016, reflect the transitionary impact of Member focus on Consent Order implementation actions including training on new tools and methods for documenting sales and time spent to then train their sales organizations. Similarmarket prior to the transitionary impact that occurredthird quarter. Sales volume weakness was offset somewhat by additional promotions offered as a result of Marketing Plan changes maderesponse to pandemic conditions. Despite the pandemic conditions, nearly all product access points in 2014, we do not expect the Consent Order toMexico, both Company-operated and third party, have a long-term material adverse impact on our net salesremained open, although in the Northsome areas Nutrition Clubs are operating under restrictions such as for product
pick-up
only.
South and Central America region or on our Member base. However, we believe net sales comparisons for the region to the prior year could continue to be negatively impacted during the first half of 2018 as we
The South and our Members continue to spend time educating and training, and as our Members implement and adjust to the changes. NorthCentral America has implemented programs to encourage sponsorship and increase Distributor, Preferred Member, and customer activity and has continued to extend the product line, including the introduction of trial packs and snack sizes for popular products.


Mexico

The Mexico region reported net sales of $442.7$366.4 million for the year ended December 31, 2017.2020. Net sales decreased $12.6 million, or 3.3% ($12.8 million, or 3.4% excluding Venezuela), for the year ended December 31, 2017 decreased $3.9 million, or 0.9%,2020 as compared to the same period in 2016.2019. In local currency, net sales increased 20.8% (9.1% excluding Venezuela) for the year ended December 31, 2017 increased 0.5%,2020 as compared to the same period in 2016.2019. The 0.9%3.3% decrease in net sales for the year ended December 31, 20172020 was primarily the resultdue to a 24.1% unfavorable impact of fluctuations in foreign currency exchange rates (12.5% unfavorable impact excluding Venezuela), partially offset by a decrease16.9% favorable impact of price increases (5.6% favorable impact excluding Venezuela) and an increase in sales volume, as indicated by a 4.8% decrease3.6% increase in Volume Points, and the effect of the strong U.S. dollar and the resulting impact of fluctuations in foreign currency rates, which reduced netPoints. The region saw a sales by approximately 1.3%. These reductions to net sales were partially offset by price increases which contributed approximately 5.2% to net sales.

We believe the Volume Point declinevolume increase for the year ended December 31, 2017, after an increase for 2016, was attributableversus the prior year led by Colombia and Chile, as markets adapted to a difficult economic environment marked by rising inflationpandemic conditions and a weaker peso, as well as the adverse impact during the third quarter of the damaging natural disaster in the greater Mexico City area. Following inception of our Member Activation Program, designed to enhance the quality of sales leaders, we have seen fewer new Members but a higher level of activity among those new Members.

South and Central America

The South and Central America region reported net sales of $474.3 million for the year ended December 31, 2017. Net sales decreased $14.4 million, or 2.9%, for the year ended December 31, 2017, as compared to the same period in 2016. In local currency, net sales increased 0.4% for the year ended December 31, 2017, as compared to the same period in 2016. Excluding Venezuela, which saw significant price increases in response to a highly inflationary environment, South and Central America local currency net sales decreased 6.0% for the year ended December 31, 2017.

The 2.9% decrease in net sales for the year ended December 31, 2017 was primarily the result of a decrease in sales volume, as indicated by a 10.4% decrease in Volume Points, and the effect of the strong U.S. dollar and the resulting impact of fluctuations in foreign currency rates, which reduced net sales by approximately 3.3%. These reductions to net sales were partially offset by price increases which increased net sales by approximately 10.7%. Volume declines have been widespread across the region for both market-specific factors and as Members in many markets continue to transition to sustainable, customer-oriented business practices. The effect of price increases on net sales for the region was largest for the Venezuela market.

In Brazil, the region’s largest market, net sales were $190.6 million for the year ended December 31, 2017. Net sales increased $0.8 million, or 0.4%, for the year ended December 31, 2017, as compared to the same period in 2016. In local currency, net sales decreased 7.7% for the year ended December 31, 2017, as compared to the same period in 2016. The fluctuation of foreign currency rates had a favorable impact of $15.3 million on net sales in Brazil for the year ended December 31, 2017. Marketing Plan changes intendedefforts to build more sustainable business for our Members through a focus on daily product consumption and retailing are takingtake hold following a lengthy transition period. In addition, wein certain markets in the region. The region is seeing success leveraging social media, utilizing cash prize promotions, and using the weight loss challenge DMO.

COVID-19
pandemic conditions, however, have introduced programsimpacted the region adversely, and significantly so for certain markets in the region including Brazil, thatPeru, Ecuador, and Bolivia. Pandemic impacts have varied by market across the region and have been successful in other regions to improve Member activity. We are also increasing the numberintermittent, but have included product shipping delays and widespread suspension of product access points enhancing our training efforts, and expanding ourMembers’ Nutrition Clubs, requiring reliance on shipping product offering, including the recent launch of a soy milk product. Changes in ICMS tax legislation, effective April 2016, reduced net sales by approximately $4.0 million for the first quarter of 2017.

to Members’ and customers’ homes.

Net sales in PeruBrazil were $62.3$84.2 million for the year ended December 31, 2017.2020. Net sales decreased $2.2$27.0 million, or 3.3%24.3%, for the year ended December 31, 20172020 as compared to the same period in 2016.2019. In local currency, net sales decreased 6.6%2.5% for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. The fluctuation of foreign currency exchange rates had a favorablean unfavorable impact of $2.1$24.3 million on net sales for the year ended December 31, 2017. As2020. In May 2019, we segmented our Member base in the market into distributors and preferred members; we are leveraging this segmentation for communication and promotion purposes, and have made preferred members a strategic focus in order to drive a larger base of new customers. We have expanded our product line to meet consumer demands in new product segments. However,
COVID-19
pandemic conditions have constrained our business in Brazil since March 2020. Although most Members’ Nutrition Clubs are now permitted to be open, broader pandemic conditions in the country have adversely impacted sales volumes for this important DMO for the market. Home delivery is operating and is the primary
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distribution channel for the market, though the majority of other areasproduct access points are now open for
pick-up.
We believe a price increase announced in December 2020 and effective in January 2021 had a favorable impact on sales volumes late in 2020 and may be an adverse factor for sales volumes for the first quarter of the region,2021.
Net sales in Peru has seen volume declines as it transitions to sustainable, consumption and retailing-oriented business practices. Declineswere $61.7 million for the year ended December 31, 2020. Net sales decreased $2.5 million, or 4.0%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 0.6% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $2.9 million on net sales for the year ended December 31, 2020. Sales volumes that were above the volumes for the prior year through
mid-March
declined significantly from that time through most of the second quarter due to pandemic conditions. We are taking orders by Internet and phone and shipping product to Member homes; during October 2020, our sales centers began to open for product
pick-up
as well as home delivery. Members’ Nutrition Clubs were also attributedmodified for home delivery only or are open for partial operation. We believe these adaptations to severe inclement weatherpandemic conditions, as well as Members’ success leveraging social media and using the weight loss challenge DMO, contributed to strengthened business momentum during the first quartersecond half of the year and changes toa slight sales volume increase for the qualification levels for certain promotions that did not achieve their objectives of increasingyear versus the number of qualifying Members.

prior year.

EMEA

EMEA

The EMEA region reported net sales of $868.7$1,208.3 million for the year ended December 31, 2017.2020. Net sales increased $53.1$210.3 million, or 6.5%21.1%, for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. In local currency, net sales increased 4.2%24.2% for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. The 6.5%21.1% increase in net sales for the year ended December 31, 20172020 was primarily the result ofdue to an increase in sales volume, as indicated by a 3.7%21.1% increase in Volume Points, and a 3.8% favorable impact of price increases which increased net salesincreases; partially offset by approximately 2.4%, and the effecta 3.1% unfavorable impact of fluctuations in foreign currency rates, which increased net sales by approximately 2.3%.exchange rates. Volume Points were generally higher across the region for the year. The increases to net sales were partially offset by an unfavorable change in country sales mix resulting from a lower percentage of our sales volume coming from markets with higher prices. ThoughVolume Point growth that has been seen across the EMEA region is made up offor a large number of markets with different characteristics and levels of success, generallyyears reflects, we believe, volume growth for the region is correlated with programs that have enhancedefforts to enhance the quality and activity of sales leaders including Member training, brand awareness, and product line expansion, as they continuewell as enhanced technology tools for ordering, business performance, and customer retailing. In addition to the major markets discussed below, strong business momentum in the United Kingdom, South Africa, and France contributed to region net sales growth for the year.
Due to
COVID-19
pandemic conditions, our sales centers and other product access points in many markets within the region are currently closed or open for limited operations only, leaving shipping for home delivery as the primary distribution channel while these conditions persist. Members are turning further to social media to carry out their sales and oversight activities. These adaptations have been successful in limiting the adverse impact of the pandemic and we believe that pandemic conditions may have been a contributing factor in the motivation and focus on customer-oriented initiatives.

of our Members in certain markets of the region.

Net sales in ItalySpain were $139.4$172.0 million for the year ended December 31, 2017.2020. Net sales increased $1.6$35.6 million, or 1.2%26.1%, for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. In local currency, net sales decreased 0.5%increased 23.3% for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. The fluctuation of foreign currency exchange rates had a favorable impact of $2.3$3.8 million on net sales in Italy for the year ended December 31, 2017. Italy2020. In recent years, Spain has seen a modest decline in new Members after several yearssales volume increases as it benefited from programs of growth. We are evaluating various Member promotions and training forsponsorships, as well as enhanced technology tools, that have raised brand awareness through healthy active lifestyle and contributed to broad-based success across Member sales organizations in the market.

In response to pandemic conditions, we have temporarily shifted our operations to primarily online activities to mitigate the negative impacts of being unable to conduct

in-person
meetings, trainings, and selling activities. Home delivery continues to be our prevailing distribution channel and has not seen significant disruption. After the first quarter of 2020 saw a small sales volume decline, subsequent quarters have seen significant volume increases as our Members appear to have adapted to pandemic conditions, such as leveraging online tools to reach their customers, and business momentum has increased.
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Net sales in Russia were $130.4$147.2 million for the year ended December 31, 2017.2020. Net sales increased $24.5$7.2 million, or 23.2%5.1%, for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. In local currency, net sales increased 17.1% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $16.9 million on net sales for the year ended December 31, 2020. Russia achieved sales volume increases for the year versus the prior year despite some pandemic disruption commencing late in the first quarter. Our sales centers are now reopened for product
pick-up,
although we continue to support home delivery for the market. Due to pandemic conditions, Nutrition Clubs are operating primarily online in the market and remain a key DMO, supported by new products, training, and promotion for all levels of Membership. Product access expansion in the market has enabled growth in smaller cities. During the third quarter of 2020, we introduced Member segmentation to the market by adding a preferred customer program option for new Members. Russia had an approximate 5% price increase in September 2020.
Net sales in Italy were $141.9 million for the year ended December 31, 2020. Net sales increased $15.8 million, or 12.5%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 10.1% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had a favorable impact of $3.0 million on net sales for the year ended December 31, 2020. Sales volume increased for the year versus the prior year. After weakened momentum in our business and pandemic conditions in the country contributed to a sales volume decline for the first quarter of the year, we believe adaptation by Members to pandemic conditions, such as online communication with Members and home delivery, has been a contributing factor to our sales volume increase and strengthened momentum for subsequent quarters.
Asia Pacific
The Asia Pacific region, which excludes China, reported net sales of $1,347.7 million for the year ended December 31, 2020. Net sales increased $98.7 million, or 7.9%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 9.2% for the year ended December 31, 2020 as compared to the same period in 2019. The 7.9% increase in net sales for the year ended December 31, 2020 was primarily due to an increase in sales volume, as indicated by an 8.0% increase in Volume Points, and a 2.0% favorable impact of price increases, partially offset by a 1.3% unfavorable impact of fluctuations in foreign currency exchange rates. Volume Point and net sales increases in recent years for most markets in the region are a result, we believe, of a customer-focused business and daily consumption DMOs, including Nutrition Clubs, as well as product line and access point expansion. However,
COVID-19
pandemic conditions, such as closed sales centers and Members’ Nutrition Clubs and an increased reliance on home delivery for product distribution, had an adverse impact on results at times throughout the year, most significantly for India, South Korea, and Indonesia. The region has adapted to pandemic conditions to varying degrees by market, and many markets achieved sales volume increases for the year compared to the prior year. Volume increases were led by Vietnam and India, and ongoing pandemic conditions contributed to volume decreases for South Korea and Indonesia.
Net sales in India were $349.1 million for the year ended December 31, 2020. Net sales increased $27.8 million, or 8.6%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 13.9% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $16.9 million on net sales for the year ended December 31, 2020. Sales volumes have increased in India in recent years as we continued to expand our product line and make it easier for our Members to do business, such as through online signup and adding product access points and payment methods. Pandemic-related operating constraints seen earlier during 2020 have now begun to ease or we and our Members have adjusted our operations to partially mitigate these constraints, with Member activities such as Nutrition Clubs and trainings mainly operating online.
Although certain Indian states have continued pandemic-related operating constraints and we have seen some reduced product manufacturing capacity, our manufacturing capacity has met demand. We continue to take Member orders and payments online. Company locations are now open for the taking of orders and payments and
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pick-up
of product, though home delivery volumes continue to exceed
pre-pandemic
levels. Disruption to our collections and expenditures of cash have eased, though we continue to move transactions to electronic collection and payment for operating efficiency purposes and for Member convenience.
Regulatory restrictions on direct selling, including registration requirements for our distributors implemented in February 2020, have reduced the number of new distributors, despite certain subsequent relaxations of regulations by the government in response to pandemic conditions. We have seen an increase in new Preferred Members since these do not have similar registration requirements. The regulatory relaxations ended effective January 2021. We continue to work with our distributors to adapt to these regulatory changes.
Net sales in Vietnam were $212.6 million for the year ended December 31, 2020. Net sales increased $49.5 million, or 30.3%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 30.3% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates did not have a material impact on net sales for the year ended December 31, 2020. Vietnam continues to have strong momentum, having adapted to increased direct-selling regulatory requirements and as sales leadership continues to focus on sustainable, consumption-oriented business practices.
COVID-19
pandemic-related operating constraints that we saw in the second quarter have eased somewhat and we and our Members have adapted to constraints by moving events, trainings, and product ordering online. Further changes to direct-selling regulations in the market are expected to be proposed for late 2021 implementation. We continue to assess and monitor these preliminary draft regulations.
Net sales in Indonesia were $181.2 million for the year ended December 31, 2020. Net sales decreased $2.3 million, or 1.3%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 1.3% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $4.7 million on net sales for the year ended December 31, 2020. Although Indonesia has increased sales volumes in recent years by focusing on a customer-based business and daily consumption through Nutrition Clubs and training activities, supported by increased product access, pandemic conditions have had an adverse impact on our operations and results. Our sales centers have continued to operate via online ordering, home delivery, and
pick-up,
which were already established methods for the market. Many Members’ Nutrition Clubs, the major DMO for the market, have experienced pandemic-related constraints on their activities. Our responsive measures include online training and promotions targeted to sales leaders,
non-sales
leader Members, and their customers as appropriate.
Net sales in South Korea were $129.0 million for the year ended December 31, 2020. Net sales decreased $14.6 million, or 10.2%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales decreased 9.0% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $1.7 million on net sales for the year ended December 31, 2020. South Korea achieved Volume Point and net sales growth for 2019 after several years of transitionary impact from Marketing Plan changes that led to contraction in our business in the market, and this growth continued in the early part of 2020. Pandemic conditions, however, including the suspension of our training facilities and our Members’ Nutrition Clubs and restrictions on gatherings, have affected the market since
mid-February
and we believe contributed to sales volume declines for the year versus the prior year. Nutrition Clubs have been open intermittently and on a limited basis, sales and training activities continue online, and delivery of product continues.
China
The China region reported net sales of $809.6 million for the year ended December 31, 2020. Net sales increased $57.6 million, or 7.7%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 7.8% for the year ended December 31, 2017,2020 as compared to the same period in 2016.2019. The fluctuation of foreign currency rates had a favorable impact of $16.3 million on net sales in Russia for the year ended December 31, 2017. Product prices in Russia were increased 5% in February 2017 and 5% in March 2016. The market has continued to utilize the Member Activation Program to attract and enhance the quality of new Members. The market has had success with new products, new training and communication approaches, and a program to re-activate former Members.

Net sales in Spain were $103.3 million for the year ended December 31, 2017. Net sales increased $4.5 million, or 4.6%, for the year ended December 31, 2017, as compared to the same period in 2016. In local currency, net sales in Spain increased 2.5% for the year ended December 31, 2017, as compared to the same period in 2016. The fluctuation of foreign currency rates had a favorable impact of $2.0 million on net sales in Spain for the year ended December 31, 2017. Product prices in Spain were increased 2% in July 2017. Spain has benefited from ongoing programs of promotions and sponsorships that have raised brand awareness through healthy active lifestyle.

Asia Pacific

The Asia Pacific region, which excludes China, reported net sales of $915.9 million for the year ended December 31, 2017. Net sales increased $2.9 million, or 0.3%, for the year ended December 31, 2017, as compared to the same period in 2016. In local currency, net sales decreased 0.9% for the year ended December 31, 2017, as compared to the same period in 2016. The 0.3%7.7% increase in net sales for the year ended December 31, 20172020 was primarily the resultdue to an

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increase in sales volume, as indicated by a 1.2%5.3% increase in Volume Points and price increases which increaseda 2.3% favorable impact of sales mix.
The volume growth for the year versus the prior year, despite some disruption due to the
COVID-19
viral outbreak, was partially attributable to comparison to a weakened 2019. During 2019, our China net sales were negatively impacted by approximately 1.3%,the Chinese government’s
100-day
review, or Review, of the health products industry, which concluded in April 2019. The Review, combined with negative media coverage about the Review, impacted our business as Members significantly reduced activities and sales meetings during and following the Review. These activities and sales meetings are important to our business as they are a central channel for attracting and retaining customers, providing personal and professional development for our Members, and promoting our products. While our Members had begun conducting meetings again toward the end of 2019 and the first quarter of 2020, the
COVID-19
pandemic resulted in travel restrictions and other temporary measures which commenced early in the first quarter and also negatively impacted our business, including renewed sales meeting restrictions and Nutrition Club closures. We and our Members have been able to partially mitigate the impact of these restrictions through 2020 by taking many sales and promotional activities online, including sales meetings. By April 2020, though subject to additional changes in conditions, China operations had largely resumed on an adapted basis. Manufacturing plants and distribution centers are open and operating normally, as well as the effect of fluctuations in foreign currency rates, which increased net Nutrition Clubs, subject to certain social distancing measures. Some
in-person
sales by approximately 1.2%.meetings have begun to be held again, based on location and size and subject to government approval, though sales meetings also continue to be successfully held online. The increases to net sales were partially offset by an unfavorable change in country sales mix resulting from a lower percentage of our sales volume coming from markets with higher prices, which reduced net sales by approximately 2.9%. The Volume Points performance for the regionmarket still has been mixed by country, with continuing increases in Indonesia and India as well as other markets, offset by declines primarily in South Korea and Taiwan.

Net sales in India were $185.1 million for the year ended December 31, 2017. Net sales increased $17.2 million, or 10.2%, for the year ended December 31, 2017, as comparednot returned to the same periodlevels of

in-person
sales meetings that existed prior to the Review; however,
in-person
meetings are supplemented by online meetings.
Focus areas for China have included expanding our
e-commerce
platform to, for example, provide the ability for our China Members to service their customers via personalized sites, and for their retail customers to purchase products directly from the Company. We have also expanded our product line for the China market, launched social media-based marketing campaigns, and continued to conduct sales promotions in 2016. In local currency,the region.
During the fourth quarter of 2020, we saw year-over-year net sales increased 6.8% fordeclines in China. We have seen a decline in the year ended December 31, 2017, as compared to the same period in 2016. The fluctuationnumber of foreign currency rates had a favorable impact of $5.8 million onnew independent service providers and net sales for the year ended December 31, 2017. India has segmented Members into preferred members and distributors as required by local regulations. India continues to expand its product line, add product pickup locations for Members, and utilize an Associate Activation Program.

Net sales in South Korea were $136.8 million for the year ended December 31, 2017. Net sales decreased $41.0 million, or 23.1%, for the year ended December 31, 2017, asfourth quarter of 2020 compared to those of the same periodthird quarter of 2020. In addition to some macroeconomic challenges in 2016. In local currency, net sales decreased 24.9% for the year ended December 31, 2017, as comparedChina, we believe one factor contributing to these declines is a recent enhancement made to the same periodrequirements for our sales representatives in 2016. The fluctuation of foreign currency rates hadChina to be eligible to apply to become independent service providers. While we believe this change was a favorable impact of $3.3 million on net sales for the year ended December 31, 2017. The South Korea market has been impacted by Marketing Plan changes, including certain changes uniquecontributing factor to the market. We believe these changes and other efforts, including a Member Activation Program that has seen successdeclines in the market, support improved retailing opportunity.


Net sales in Indonesia were $133.0 million for the year ended December 31, 2017. Net sales increased $19.1 million, or 16.7%, for the year ended December 31, 2017, as compared to the same period in 2016. In local currency, net sales increased 17.4% for the year ended December 31, 2017, as compared to the same period in 2016. The fluctuation of foreign currency rates had an unfavorable impact of $0.8 million on net sales for the year ended December 31, 2017. The Indonesia market has continued to strengthen by focusing on a customer-based business and daily consumption through Nutrition Clubs, training activities, and new products. We have increased the number of product access points for the market, expanded a city-by-city training and promotion approach, and introduced a Member pack oriented toward business builders.

Net sales in Taiwan were $117.8 million for the year ended December 31, 2017. Net sales decreased $9.6 million, or 7.5%, for the year ended December 31, 2017, as compared to the same period in 2016. In local currency, net sales decreased 12.8% for the year ended December 31, 2017, as compared to the same period in 2016. The fluctuation of foreign currency rates had a favorable impact of $6.7 million on net sales for the year ended December 31, 2017. Taiwan sales have declined versus prior years as the market adjusts to and Members optimize programs and training intended to help Members establish customer-based, sustainable business approaches.

China

Net sales in China were $885.9 million for the year ended December 31, 2017. Net sales increased $17.1 million, or 2.0%, for the year ended December 31, 2017, as compared to the same period in 2016. In local currency, net sales increased 4.0% for the year ended December 31, 2017, as compared to the same period in 2016. The net sales increase for the year was the result of price increases effective April 2017, which increased net sales by approximately 3.3%, and an increase in sales volume, as indicated by a 1.4% increase in Volume Points, partially offset by the unfavorable impact of fluctuations in foreign currency rates, which reduced net sales by approximately 2.0%.

Although sales volume saw a slight increase for the year ended December 31, 2017,fourth quarter, we believe this enhancement will ultimately strengthen our business by improving the lower ratequality of increase in volume versus recent years is attributable to factors such as a reduction in the number of Nutrition Clubs as Members in some cases consolidated smaller clubs into larger, more commercialized clubs; government limitations on companies conducting commercial meetings ahead of the National Congress held this fall; and Member overemphasis on social media business methods over more traditional methods. We have introduced the Member Activation Program for new members, expanded our online ordering platform, added new products for the market, and renewed a branding campaign.

independent service providers.

Sales by Product Category

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

Retail

Value(2)

 

 

Distributor

Allowance

 

 

Product

Sales

 

 

Shipping &

Handling

Revenues

 

 

Net

Sales

 

 

Retail

Value(2)

 

 

Distributor

Allowance

 

 

Product

Sales

 

 

Shipping &

Handling

Revenues

 

 

Net

Sales

 

 

% Change

in Net

Sales

 

 

 

(Dollars in millions)

 

Weight Management

 

$

4,593.6

 

 

$

(1,899.1

)

 

$

2,694.5

 

 

$

148.0

 

 

$

2,842.5

 

 

$

4,621.5

 

 

$

(1,915.5

)

 

$

2,706.0

 

 

$

158.5

 

 

$

2,864.5

 

 

 

(0.8

)%

Targeted Nutrition

 

 

1,749.7

 

 

 

(723.3

)

 

 

1,026.4

 

 

 

56.4

 

 

 

1,082.8

 

 

 

1,714.7

 

 

 

(710.7

)

 

 

1,004.0

 

 

 

58.8

 

 

 

1,062.8

 

 

 

1.9

%

Energy, Sports and Fitness

 

 

426.4

 

 

 

(176.3

)

 

 

250.1

 

 

 

13.7

 

 

 

263.8

 

 

 

432.9

 

 

 

(179.4

)

 

 

253.5

 

 

 

14.9

 

 

 

268.4

 

 

 

(1.7

)%

Outer Nutrition

 

 

151.7

 

 

 

(62.7

)

 

 

89.0

 

 

 

4.9

 

 

 

93.9

 

 

 

178.2

 

 

 

(73.9

)

 

 

104.3

 

 

 

6.1

 

 

 

110.4

 

 

 

(14.9

)%

Literature, Promotional and

    Other(1)

 

 

137.1

 

 

 

3.2

 

 

 

140.3

 

 

 

4.4

 

 

 

144.7

 

 

 

172.5

 

 

 

3.9

 

 

 

176.4

 

 

 

5.9

 

 

 

182.3

 

 

 

(20.6

)%

Total

 

$

7,058.5

 

 

$

(2,858.2

)

 

$

4,200.3

 

 

$

227.4

 

 

$

4,427.7

 

 

$

7,119.8

 

 

$

(2,875.6

)

 

$

4,244.2

 

 

$

244.2

 

 

$

4,488.4

 

 

 

(1.4

)%

Net sales by product category were as follows:

   
Year Ended December 31,
 
   
2020
   
2019
   
% Change
 
   
(Dollars in millions)
 
Weight Management
  $3,312.8   $3,012.5    10.0
Targeted Nutrition
   1,527.4    1,278.5    19.5
Energy, Sports, and Fitness
   437.4    352.0    24.3
Outer Nutrition
   111.3    97.3    14.4
Literature, Promotional, and Other(1)
   152.9    136.8    11.8
  
 
 
   
 
 
   
Total
  $5,541.8   $4,877.1    13.6
  
 
 
   
 
 
   

(1)

Product buy backsbuybacks and returns in all product categories are included in the literature, promotional, and other category.

(2)

Retail value is a Non-GAAP measure which may not be comparable to similarly-titled measures used by other companies. See “Presentation” above for a discussion of how we calculate retail value and why we believe the measure is useful to investors.

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Net sales increased for all product categories except for Targeted Nutrition, decreased for the year ended December 31, 20172020 as compared to the same period in 2016.2019. The trendtrends and business factors described in the above discussions of the individual geographic regions apply generally to all product categories.


Gross Profit

Gross profit was $3,579.1$4,391.2 million and $3,919.1 million for the years ended December 31, 2020 and 2019, respectively. Gross profit as a percentage of net sales was 79.2% and 80.4% for the years ended December 31, 2020 and 2019, respectively, or an unfavorable net decrease of 112 basis points.
The decrease in gross profit as a percentage of net sales for the year ended December 31, 2017,2020 as compared to $3,633.8 million for the same period in 2016. As a percentage2019 included unfavorable cost changes of net sales, gross profit for the year ended December 31, 2017 was 80.8% as compared64 basis points relating to 81.0% for the same period in 2016, or an unfavorable net decrease of 13 basis points. The gross profit rate for the year ended December 31, 2017 included increased freight costs due to orders shifting toward home delivery versus Member
pick-up,
the unfavorable impact of foreign currency fluctuations of 9044 basis points (unfavorable impact of 27 basis points excluding Venezuela), unfavorable cost changes related to self-manufacturing and sourcing of 30 basis points, which includes decreased costs related to Mexico tariffs, unfavorable changes in country mix of 916 basis points, the unfavorable impact of higher inventory write-downs of 15 basis points, and unfavorable other cost changes of 911 basis points, partially offset by the favorable impact of retail price increases of 6168 basis points (favorable impact of 52 basis points excluding Venezuela). The net unfavorable impact of foreign currency fluctuations and cost savings through strategic sourcing and self-manufacturing of 34retail price increases in Venezuela for the year ended December 31, 2020 as compared to the same period in 2019 was 1 basis points. point.
Generally, gross profit as a percentage of net sales may vary from period to period due to the impact of foreign currency fluctuations, changes in country mix as volume changes among countries with varying margins, retail price increases, cost savings through strategicchanges related to self-manufacturing and sourcing, and self-manufacturing,inventory write-downs.
Royalty Overrides
Royalty overrides were $1,690.1 million and inventory write-downs.

Royalty Overrides

Royalty Overrides were $1,254.2$1,448.2 million for the yearyears ended December 31, 2017, as compared to $1,272.6 million for the same period in 2016.2020 and 2019, respectively. Royalty Overrides as a percentage of net sales were 28.3% for the year ended December 31, 2017 as compared to 28.4% for the same period in 2016. Compensation to our independent service providers in China is included in selling, general and administrative expenses as opposed to royalty overrides where it is included for all other Members. Generally, royalty overrides as a percentage of net sales may vary slightly from period to period due to changes in the mix of products and countries because full royalty overrides are not paid on certain products and in certain countries.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1,758.6 million for the year ended December 31, 2017, as compared to $1,966.9 million for the same period in 2016. Selling, general and administrative expenses as a percentage of net sales were 39.7% for the year ended December 31, 2017, as compared to 43.8% for the same period in 2016.

The decrease in selling, general and administrative expenses for the year ended December 31, 2017 was driven by the $203.0 million regulatory settlements in 2016; $11.2 million in lower professional fees primarily from lower expenses related to allegations raised by a hedge fund manager and lower expenses related to the recovery of costs from KPMG associated with the re-audit of our 2010 to 2012 financial statements; $9.5 million in lower Member promotion and event costs; $9.2 million in lower travel expenses due to cost control initiatives; and $9.1 million in lower advertising and sponsorship expenses; partially offset by $25.7 million in higher labor and employee benefit costs and $12.4 million in higher service fees to China independent service providers related to sales growth in China.

In late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program and announced that the hedge fund manager had taken a significant short position regarding our common shares, leading to intense public scrutiny and significant stock price volatility. We have engaged legal and advisory services firms to assist with responding to the allegations and to perform other related services in connection to these events. For the year ended December 31, 2017, we recorded approximately $5.0 million of expenses related to this matter, of which approximately $3.2 million was related to legal, advisory and other professional service fees. For the year ended December 31, 2016, we recorded approximately $12.1 million of expenses related to this matter, of which approximately $9.5 million was related to legal, advisory and other professional service fees.

Other Operating Income

Other operating income was $50.8 million for the year ended December 31, 2017, as compared to $63.8 million for the same period in 2016. The decrease in other operating income was due to the arbitration award received in 2016 in connection with the re-audit of our 2010 to 2012 financial statements after the resignation of KPMG as our independent registered public accounting firm (See Note 2, Basis of Presentation, to the Consolidated Financial Statements for further discussion); partially offset by an increase in government grant income related to China.


Net Interest Expense

Net interest expense is as follows:

Net Interest Expense

 

Year Ended

December 31,

2017

 

 

Year Ended

December 31,

2016

 

 

 

(Dollars in millions)

 

Interest expense

 

$

160.8

 

 

$

99.3

 

Interest income

 

 

(14.5

)

 

 

(5.9

)

Net Interest Expense

 

$

146.3

 

 

$

93.4

 

The increase in net interest expense for the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to the increase in our interest expense due to higher interest rates and increased borrowing amounts relating to our new $1.45 billion senior secured credit facility, which includes a $1.3 billion term loan B, that was entered into on February 15, 2017 as discussed further below in Liquidity and Capital Resources. These increases were partially offset by higher interest income resulting from higher cash balances mainly due to the proceeds of the new term loan B.

Other (Income) Expense, Net

The $0.4 million of other income for the year ended December 31, 2017 relates to the gain on the revaluation of the CVR provided to the participants of the modified Dutch auction tender offer that closed in October 2017 (See Note 8, Shareholders’ (Deficit) Equity, to the Consolidated Financial Statements).

Income Taxes

Income taxes were $257.3 million for the year ended December 31, 2017, as compared to $104.7 million for the same period in 2016. As a percentage of pre-tax income, the effective income tax rate was 54.6% for the year ended December 31, 2017, as compared to 28.7% for the same period in 2016. The increase to the effective tax rate for the year ended December 31, 2017, as compared to the same period in 2016, is primarily due to the establishment of a valuation allowance against U.S. foreign tax credits. See Note 12, Income Taxes, to the Consolidated Financial Statements for additional discussion.

Financial Results for the year ended December 31, 2016 compared to the year ended December 31, 2015

Net sales for the year ended December 31, 2016 were relatively flat at $4,488.4 million compared to $4,469.0 million in 2015. In local currency, net sales for the year ended December 31, 2016 increased 6.3% as compared to the same period in 2015. The slight increase in net sales for the year ended December 31, 2016 was primarily the result of an increase in sales volume, as indicated by an increase in Volume Points, and the impact of price increases which increased net sales by approximately 4.6% and 2.2%, respectively. These increases were partially offset by the effect of the strong U.S. dollar and the resulting fluctuation in foreign currency rates which reduced net sales by approximately 5.8%.

Net income for the year ended December 31, 2016 decreased 23.3% to $260.0 million, or $3.02 per diluted share, compared to $339.1 million, or $3.97 per diluted share, for the same period in 2015. The decrease for the year ended December 31, 2016 was primarily due to the $203.0 million regulatory settlements; partially offset by the net sales growth as discussed above; $27.7 million in higher government grant income in China; $29.7 million arbitration award related to the re-audit; $23.3 million in lower foreign exchange losses primarily related to the remeasurement of our Venezuela Bolivar-denominated assets and liabilities described below; and lower income taxes.


Net income for the year ended December 31, 2016 included a $203.0 million pre-tax unfavorable impact ($133.0 million post-tax) related to regulatory settlements; a $34.2 million pre-tax favorable impact ($24.3 million post-tax) of government grant income in China; a $29.7 million pre-tax favorable impact ($25.8 million post-tax) related to the arbitration award in connection with the re-audit; a $45.1 million unfavorable impact of non-cash interest expense related to the Convertible Notes and the Forward Transactions (See Note 4, Long-Term Debt, to the Consolidated Financial Statements); a $16.3 million pre-tax unfavorable impact ($10.8 million post-tax) from expenses related to regulatory inquiries; a $12.1 million pre-tax unfavorable impact ($9.0 million post-tax) related to legal, advisory services and other expenses for our response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); a $3.6 million pre-tax unfavorable impact ($2.6 million post-tax) related to expenses incurred for the recovery of costs associated with the re-audit of our 2010 to 2012 financial statements after the resignation of KPMG as our independent registered public accounting firm; and a $10.7 million pre-tax unfavorable impact ($7.1 million post-tax) related to the implementation of the Consent Order, comprised of $9.0 million of legal, advisory, and other expenses and $1.7 million of product discounts related to preferred member conversions.

Net income for the year ended December 31, 2015 included a $36.9 million pre-tax unfavorable impact ($23.9 million post-tax), comprised of $32.9 million foreign exchange losses related to the remeasurement of Venezuela Bolivar-denominated assets and liabilities at the SICAD II and SIMADI rates, $1.7 million of Venezuela inventory write downs, and a $2.3 million impairment loss on Venezuela bonds; $5.6 million pre-tax unfavorable impact ($3.8 million post-tax) of financing costs from transactions to convert Bolivars to U.S. dollars in 2015; $7.5 million pre-tax favorable impact from foreign exchange gain ($8.3 million post-tax) resulting from Euro/U.S. dollar exposure primarily related to intercompany balances; a $18.7 million pre-tax unfavorable impact ($13.8 million post-tax) related to legal, advisory services and other expenses for our response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); a $21.4 million pre-tax unfavorable impact ($14.2 million post-tax) from expenses related to regulatory inquiries; a $1.9 million pre-tax favorable impact ($1.2 million post-tax) related to a reduction in the legal reserve for the Bostick case in 2014; a $3.1 million pre-tax favorable impact ($2.0 million post-tax) related to the recovery of a previously impaired defective manufacturing equipment from the vendor; a $42.2 million unfavorable impact of non-cash interest expense related to the Convertible Notes and the Forward Transactions (See Note 4, Long-Term Debt, to the Consolidated Financial Statements and Liquidity and Capital Resources — Share Repurchases below for further discussion); and a $2.0 million pre-tax unfavorable impact ($1.3 million post-tax) related to expenses incurred for the recovery of costs associated with the re-audit of our 2010 to 2012 financial statements after the resignation of KPMG as our independent registered public accounting firm.

Reporting Segment Results

We aggregate our operating segments, excluding China, into a reporting segment, or the Primary Reporting Segment. The Primary Reporting Segment includes the North America, Mexico, South & Central America, EMEA, and Asia Pacific regions. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. See Note 10, Segment Information, to the Consolidated Financial Statements for further discussion of our reporting segments. See below for discussions of net sales and contribution margin by our reporting segments.

Net Sales by Reporting Segment

The Primary Reporting Segment reported net sales of $3,619.6 million for the year ended December 31, 2016. Net sales for the Primary Reporting Segment decreased $3.2 million, or 0.1%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased 5.7% for the year ended December 31, 2016 as compared to the same period in 2015 for the Primary Reporting Segment. The slight decrease in net sales for the year ended December 31, 2016 was primarily the result of the strong U.S. dollar and the resulting impact of fluctuations in foreign currency rates and an unfavorable change in country sales mix resulting from a lower percentage of our sales volume coming from markets with higher prices which reduced net sales by approximately 5.8% and 1.1%, respectively, partially offset by an increase in sales volume, as indicated by an increase in Volume Points and price increases which increased net sales by approximately 4.3% and 2.7%, respectively.

For a discussion of China’s net sales for the year ended December 31, 2016, as compared to the same period in 2015, see the China section of the Sales by Geographic Region below.


Contribution Margin by Reporting Segment

As discussed above under “Presentation,” contribution margin consists of net sales less cost of sales and royalty overrides. The Primary Reporting Segment reported contribution margin of $1,571.9 million for the year ended December 31, 2016. Contribution margin for the Primary Reporting Segment decreased $26.9 million, or 1.7%, for the year ended December 31, 2016, as compared to the same period in 2015. The 1.7% decrease for the year ended December 31, 2016 was primarily the result of fluctuations in the foreign currency rates which reduced contribution margin by approximately 10.1%, partially offset by an increase in volume, as indicated by an increase in Volume Points, and the favorable impact of price increases, which increased contribution margin by approximately 4.9% and 4.2%, respectively.

China reported contribution margin of $789.3 million for the year ended December 31, 2016. Contribution margin for China increased $26.5 million, or 3.5%, for the year ended December 31, 2016, as compared to the same period in 2015. The increase for the year ended December 31, 2016 was primarily the result of a volume increase, as indicated by an increase in Volume Points, and product mix which increased contribution margin by approximately 7.3% and 1.1%, respectively, partially offset by the unfavorable impact of fluctuations in foreign currency rates, which reduced net sales by approximately 5.5%.

Sales by Geographic Region

The following chart reconciles retail value to net sales by geographic region:

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

Retail

Value(1)

 

 

Distributor

Allowance

 

 

Product

Sales

 

 

Shipping &

Handling

Revenues

 

 

Net

Sales

 

 

Retail

Value(1)

 

 

Distributor

Allowance

 

 

Product

Sales

 

 

Shipping &

Handling

Revenues

 

 

Net

Sales

 

 

Change

in Net

Sales

 

 

 

(Dollars in millions)

 

North America

 

$

1,587.0

 

 

$

(721.3

)

 

$

865.7

 

 

$

90.0

 

 

$

955.7

 

 

$

1,455.0

 

 

$

(658.2

)

 

$

796.8

 

 

$

82.7

 

 

$

879.5

 

 

 

8.7

%

Mexico

 

 

767.2

 

 

 

(347.6

)

 

 

419.6

 

 

 

27.0

 

 

 

446.6

 

 

 

822.5

 

 

 

(370.6

)

 

 

451.9

 

 

 

28.0

 

 

 

479.9

 

 

 

(6.9

)%

South & Central America

 

 

848.2

 

 

 

(393.5

)

 

 

454.7

 

 

 

34.0

 

 

 

488.7

 

 

 

954.4

 

 

 

(438.2

)

 

 

516.2

 

 

 

53.5

 

 

 

569.7

 

 

 

(14.2

)%

EMEA

 

 

1,398.9

 

 

 

(633.9

)

 

 

765.0

 

 

 

50.6

 

 

 

815.6

 

 

 

1,296.6

 

 

 

(588.3

)

 

 

708.3

 

 

 

46.8

 

 

 

755.1

 

 

 

8.0

%

Asia Pacific

 

 

1,531.9

 

 

 

(656.9

)

 

 

875.0

 

 

 

38.0

 

 

 

913.0

 

 

 

1,508.3

 

 

 

(637.0

)

 

 

871.3

 

 

 

67.3

 

 

 

938.6

 

 

 

(2.7

)%

China

 

 

986.6

 

 

 

(122.4

)

 

 

864.2

 

 

 

4.6

 

 

 

868.8

 

 

 

957.6

 

 

 

(115.6

)

 

 

842.0

 

 

 

4.2

 

 

 

846.2

 

 

 

2.7

%

Worldwide

 

$

7,119.8

 

 

$

(2,875.6

)

 

$

4,244.2

 

 

$

244.2

 

 

$

4,488.4

 

 

$

6,994.4

 

 

$

(2,807.9

)

 

$

4,186.5

 

 

$

282.5

 

 

$

4,469.0

 

 

 

0.4

%

(1)

Retail value is a Non-GAAP measure which may not be comparable to similarly-titled measures used by other companies. See “Presentation” above for a discussion of how we calculate retail value and why we believe the measure is useful to investors.

North America

The North America region reported net sales of $955.7 million for the year ended December 31, 2016. Net sales increased $76.2 million, or 8.7%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased by the same 8.7% for the year ended December 31, 2016, as compared to the same period in 2015. The increase in net sales for the year ended December 31, 2016, as compared to the same period in 2015, was a result of a net sales increase in the U.S. of $75.0 million or 8.7%. The 8.7% increase in net sales for the North America region for the year ended December 31, 2016 was primarily the result of an increase in sales volume, as indicated by an increase in Volume Points, which increased net sales by approximately 8.0%, as well as price increases which contributed approximately 0.8% to net sales.

We believe North America’s Volume Point increase for 2016, versus decreases for the prior several years, reflected the positive results of Members having adjusted to the previously disclosed historical revisions in our Marketing Plan. The revisions were intended to enhance and reward a customer-centric business focus where we encourage Members to achieve product results and gain experience in the Herbalife business prior to attempting to qualify for sales leader. We also saw a positive impact from customer acquisition promotions for new Members.


Mexico

The Mexico region reported net sales of $446.6 million for the year ended December 31, 2016. Net sales for the year ended December 31, 2016 decreased $33.3 million, or 6.9%, as compared to the same period in 2015. In local currency, net sales for the year ended December 31, 2016 increased 9.6%, as compared to the same period in 2015. The 6.9% decrease in net sales for the year ended December 31, 2016 was primarily the result of the effect of the strong U.S. dollar and the resulting impact of fluctuations in foreign currency rates, which reduced net sales by approximately 16.5%. This reduction to net sales was partially offset by an increase in sales volume, as indicated by an increase in Volume Points, and price increases which contributed approximately 9.1% and 0.5%, respectively to net sales.

We believe Mexico’s Volume Point increase for 2016 versus a decrease for 2015, reflected the positive results of Members having adjusted to the previously disclosed historical revisions in our Marketing Plan, which include rules that require Members attempting to qualify for sales leader status to purchase directly from Herbalife rather than from their sponsor Member (these transactions with the sponsor Member are known as “field sales”). Also significantly, Mexico had instituted customer acquisition promotions for new Members. The Mexico market had also improved service to Members by expanding the number of locations at which Members could pay for and pick up orders.

South and Central America

The South and Central America region reported net sales of $488.7 million for the year ended December 31, 2016. Net sales decreased $81.0 million, or 14.2%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales decreased 2.8% for the year ended December 31, 2016, as compared to the same period in 2015. The 14.2% decrease in net sales for the year ended December 31, 2016 was the result of a decline in sales volume, as indicated by a decrease in Volume Points, and fluctuations in foreign currency rates, which reduced net sales by approximately 13.7% and 11.4%, respectively. These reductions to net sales were partially offset by price increases which increased net sales by approximately 11.8%.

We believe the decline in Volume Points for the region for 2016, continuing a trend of declines for prior years, was a result of certain country-specific challenges in the markets making up the region discussed below.

In Brazil, the region’s largest market, net sales were $189.8 million for the year ended December 31, 2016. Net sales decreased $66.9 million, or 26.1%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales decreased 20.5% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $14.2 million on net sales in Brazil for the year ended December 31, 2016. Changes in ICMS tax legislation, effective for 2016, reduced net sales by approximately $14 million. Brazil’s net sales decrease for the year ended December 31, 2016 was also attributable to adverse economic and political conditions in the market and foreign currency fluctuations. We believe this challenging business environment contributed to Members in Brazil transitioning more slowly through the previously disclosed Marketing Plan changes implemented compared with other major markets. We introduced programs in Brazil that were successful in other regions to improve member activity and productivity. We also increased the number of product access points, expanded our product offering to promote more frequent consumption moments, and explored product affordability approaches for the market.

Net sales in Peru were $64.4 million for the year ended December 31, 2016. Net sales increased $0.8 million, or 1.3%, for the year ended December 31, 2016 as compared to the same period in 2015. In local currency, net sales increased 7.6% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $4.0 million on net sales for the year ended December 31, 2016. The market saw success with strategies such as Nutrition Clubs and customer acquisition promotions for new Members.

Net sales in Venezuela were $11.4 million for the year ended December 31, 2016. Net sales decreased $5.8 million, or 33.9%, for the year ended December 31, 2016, as compared to the same period in 2015. Significant Bolivar-to-dollar exchange rate deterioration and sales volume declines were partially offset by the impact of significant price increases in the market due to an inflationary environment. Venezuela net sales represent less than 1% of our consolidated net sales.


EMEA

The EMEA region reported net sales of $815.6 million for the year ended December 31, 2016. Net sales increased $60.5 million, or 8.0%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased 14.2% for the year ended December 31, 2016, as compared to the same period in 2015. The 8.0% increase in net sales for the year ended December 31, 2016 was primarily the result of an increase in sales volume, as indicated by an increase in Volume Points, and price increases which increased net sales by approximately 13.8% and 2.1%, respectively. This increase in net sales was partially offset by the effect of the strong U.S. dollar and the resulting impact of fluctuations in foreign currency rates, which reduced net sales by approximately 6.1%. The EMEA region has had several years of strong growth in sales volume, as indicated by an increase in Volume Points. Though the region is made up of a large number of markets with different characteristics and levels of success, generally we believe volume growth for the region for 2016 is correlated with programs that have enhanced the quality and activity of sales leaders as they continue to focus on customer-oriented initiatives.

Net sales in Italy were $137.8 million for the year ended December 31, 2016. Net sales increased $10.8 million, or 8.5%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased 8.7% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $0.3 million on net sales in Italy for the year ended December 31, 2016. Italy continued to benefit from an organized training approach, events such as city-by-city tours, and efforts to increase brand awareness.

Net sales in Spain were $98.8 million for the year ended December 31, 2016. Net sales increased $12.1 million, or 13.9%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales in Spain increased 14.1% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $0.2 million on net sales in Spain for the year ended December 31, 2016. Spain continued to increase the number of Member locations such as Nutrition Clubs, and utilized local marketing strategies to increase brand awareness.

Net sales in Russia were $105.9 million for the year ended December 31, 2016. Net sales increased $5.5 million, or 5.5%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased 15.9% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $10.5 million on net sales in Russia for the year ended December 31, 2016. Product prices in Russia were increased 5% in March 2016 and 14% in March 2015. Russia continued to emphasize the strategy of building a sustainable business through customer focused activities, including customer acquisition promotions for new Members.

Net sales in the United Kingdom were $44.7 million for the year ended December 31, 2016. Net sales decreased $9.9 million, or 18.1%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales in the United Kingdom decreased 8.3% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $5.4 million on net sales in the United Kingdom for the year ended December 31, 2016.

Asia Pacific

The Asia Pacific region, which excludes China, reported net sales of $913.0 million for the year ended December 31, 2016. Net sales decreased $25.6 million, or 2.7%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales decreased 0.6% for the year ended December 31, 2016, as compared to the same period in 2015. The 2.7% decrease in net sales for the year ended December 31, 2016 was primarily due to an unfavorable change in country sales mix resulting from a lower percentage of our sales volume coming from markets with higher prices and the impact of fluctuations in foreign currency rates, which reduced net sales by approximately 2.4% and 2.1%, respectively. This reduction to net sales was partially offset by an increase in sales volume, as indicated by an increase in Volume Points, and price increases which contributed approximately 1.1% and 0.6%, respectively, to net sales. We believe the increases in Volume Points for the region for 2016, despite a significant decline for the South Korea market, were driven by country-specific factors including those discussed below.

Net sales in South Korea were $177.8 million for the year ended December 31, 2016. Net sales decreased $89.2 million, or 33.4%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales decreased 31.3% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $5.5 million on net sales for the year ended December 31, 2016. South Korea has been negatively impacted by a number of changes in the Marketing Plan, some of which are unique to South Korea. In addition to the shift in emphasis toward the longer-term sales leader qualification method, we also changed the product discount structure in South Korea and began charging a fee for the Member kit in 2016. Previously, the Member kit in South Korea was free. While we believed these changes would benefit the market in the long term, they resulted in sales declines as sales leaders continued to adapt to these new methods of operation.


Net sales in India were $167.9 million for the year ended December 31, 2016. Net sales decreased $1.5 million, or 0.9%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased 3.7% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $7.7 million on net sales for the year ended December 31, 2016. In May 2016, we introduced a customer acquisition promotion which we believe contributed to higher sales leader activity and productivity compared to the same period in 2015. India continued to expand its product line.

Net sales in Taiwan were $127.4 million for the year ended December 31, 2016. Net sales increased $1.3 million, or 1.0%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased 2.8% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had an unfavorable impact of $2.2 million on net sales for the year ended December 31, 2016. Taiwan had a price increase of 2.8% in June 2016.

Net sales in Indonesia were $113.9 million for the year ended December 31, 2016. Net sales increased $27.8 million, or 32.2%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased 31.3% for the year ended December 31, 2016, as compared to the same period in 2015. The fluctuation of foreign currency rates had a favorable impact of $0.8 million on net sales for the year ended December 31, 2016. Indonesia had price increases of 3% in September 2016 and 6% in October 2015. The Indonesia market continued to make progress by focusing on a customer-based business and daily consumption through Nutrition Clubs, training activities, and new products. We increased the number of product access points for the market as well.

China

Net sales in China were $868.8 million for the year ended December 31, 2016. Net sales increased $22.6 million, or 2.7%, for the year ended December 31, 2016, as compared to the same period in 2015. In local currency, net sales increased 8.5% for the year ended December 31, 2016, as compared to the same period in 2015. The net sales increase for the year was primarily the result of an increase in sales volume, as indicated by an increase in Volume Points, of approximately 7.4%, partially offset by the unfavorable impact of fluctuations in foreign currency rates, which reduced net sales by approximately 5.8%.

We saw continued adoption and acculturation of daily consumption DMOs in the China market, including Nutrition Clubs, aided by a Preferred Customer program, a Healthy Active Lifestyle program and supported by ongoing investments in advertising, corporate social responsibility and brand awareness. We continued to enhance service provider support and product access in China through online and mobile platforms. We believe the lower rate of sales volume increase for the year compared with recent years, including a volume decline for the fourth quarter of 2016, as indicated by a decrease in Volume Points, were attributable to factors such as Members testing new business methods that did not prove to be as sustainable as traditional methods.

Sales by Product Category

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

Retail

Value(2)

 

 

Distributor

Allowance

 

 

Product

Sales

 

 

Shipping &

Handling

Revenues

 

 

Net

Sales

 

 

Retail

Value(2)

 

 

Distributor

Allowance

 

 

Product

Sales

 

 

Shipping &

Handling

Revenues

 

 

Net

Sales

 

 

% Change

in Net

Sales

 

 

 

(Dollars in millions)

 

Weight Management

 

$

4,621.5

 

 

$

(1,915.5

)

 

$

2,706.0

 

 

$

158.5

 

 

$

2,864.5

 

 

$

4,567.1

 

 

$

(1,888.7

)

 

$

2,678.4

 

 

$

184.4

 

 

$

2,862.8

 

 

 

0.1

%

Targeted Nutrition

 

 

1,714.7

 

 

 

(710.7

)

 

 

1,004.0

 

 

 

58.8

 

 

 

1,062.8

 

 

 

1,620.0

 

 

 

(670.0

)

 

 

950.0

 

 

 

65.4

 

 

 

1,015.4

 

 

 

4.7

%

Energy, Sports and Fitness

 

 

432.9

 

 

 

(179.4

)

 

 

253.5

 

 

 

14.9

 

 

 

268.4

 

 

 

400.2

 

 

 

(165.5

)

 

 

234.7

 

 

 

16.2

 

 

 

250.9

 

 

 

7.0

%

Outer Nutrition

 

 

178.2

 

 

 

(73.9

)

 

 

104.3

 

 

 

6.1

 

 

 

110.4

 

 

 

212.1

 

 

 

(87.7

)

 

 

124.4

 

 

 

8.6

 

 

 

133.0

 

 

 

(17.0

)%

Literature, Promotional and

    Other(1)

 

 

172.5

 

 

 

3.9

 

 

 

176.4

 

 

 

5.9

 

 

 

182.3

 

 

 

195.0

 

 

 

4.0

 

 

 

199.0

 

 

 

7.9

 

 

 

206.9

 

 

 

(11.9

)%

Total

 

$

7,119.8

 

 

$

(2,875.6

)

 

$

4,244.2

 

 

$

244.2

 

 

$

4,488.4

 

 

$

6,994.4

 

 

$

(2,807.9

)

 

$

4,186.5

 

 

$

282.5

 

 

$

4,469.0

 

 

 

0.4

%

(1)

Product buy backs and returns in all product categories are included in literature, promotional and other category.

(2)

Retail value is a Non-GAAP measure which may not be comparable to similarly-titled measures used by other companies. See “Presentation” above for a discussion of how we calculate retail value and why we believe the measure is useful to investors.


Net sales for the Weight Management, Targeted Nutrition, and Energy, Sports and Fitness product categories increased for the year ended December 31, 2016 as compared to the same period in 2015. Net sales for the Outer Nutrition and Literature, Promotional, and Other product categories decreased for the year ended December 31, 2016 as compared to the same period in 2015. The trend and business factors described in the above discussions of the individual geographic regions apply generally to all product categories.

Gross Profit

Gross profit was $3,633.8 million for the year ended December 31, 2016, as compared to $3,613.0 million for the same period in 2015. As a percentage of net sales, gross profit for the year ended December 31, 2016 was 81.0% as compared to 80.9% for the same period in 2015, or a favorable net increase of 10 basis points. The gross profit rate for the year ended December 31, 2016 included the favorable impact of cost savings through strategic sourcing and self-manufacturing of 80 basis points, retail price increases of 40 basis points, lower inventory write-downs of 23 basis points, and country mix of 18 basis points, partially offset by the unfavorable impact of foreign currency fluctuations of 140 basis points and other cost changes of 11 basis points. Generally, gross profit as a percentage of net sales may vary from period to period due to the impact of foreign currency fluctuations, changes in country mix as volume changes among countries with varying margins, retail price increases, cost savings through strategic sourcing and self-manufacturing, and inventory write-downs.

Royalty Overrides

Royalty Overrides were $1,272.6 million for the year ended December 31, 2016, as compared to $1,251.4 million for the same period in 2015. Royalty Overrides as a percentage of net sales were 28.4% for the year ended December 31, 2016 as compared to 28.0% for the same period in 2015. The changes in royalty overrides as a percentage of net sales were primarily due to30.5% and 29.7% for the sales in our China business relative to that of our worldwide business. Compensationyears ended December 31, 2020 and 2019, respectively.

Service fees to our independent service providers in China isare included in selling, general, and administrative expenses as opposed to royalty overrides where it is includedwhile Member compensation for all other Members.countries is included in Royalty overrides. Generally, royaltyRoyalty overrides as a percentage of net sales may vary from period to period due to changes in the mix of products and countries because full royalty overrides are not paid on certain products and in certain countries.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were $1,966.9$2,075.0 million and $1,940.3 million for the yearyears ended December 31, 2016, as compared to $1,784.5 million for the same period in 2015.2020 and 2019, respectively. Selling, general, and administrative expenses as a percentage of net sales were 43.8%37.4% and 39.8% for the yearyears ended December 31, 2016, as compared to 39.9% for the same period in 2015.

2020 and 2019, respectively.

The increase in selling, general, and administrative expenses for the year ended December 31, 2016 was primarily due to the $203.0 million regulatory settlements; partially offset by $23.3 million in lower net foreign exchange losses, which included $28.5 million lower net foreign exchange losses from the remeasurement of our Bolivar-denominated monetary assets and liabilities.

In late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program and announced that the hedge fund manager had taken a significant short position regarding our common shares, leading to intense public scrutiny and significant stock price volatility. We have engaged legal and advisory services firms to assist with responding to the allegations and to perform other related services in connection to these events. For the year ended December 31, 2016, we recorded approximately $12.1 million of expenses related to this matter, of which approximately $9.5 million was related to legal, advisory and other professional service fees. For the year ended December 31, 2015, we recorded approximately $18.7 million of expenses related to this matter, of which approximately $16.8 million was related to legal, advisory and other professional service fees.

Other Operating Income

Other operating income was $63.8 million for the year ended December 31, 2016, as compared to $6.5 million for the same period in 2015. The increase in other operating income was due to an increase in government grant income related to China and the arbitration award received in 2016 in connection with the re-audit of our 2010 to 2012 financial statements after the resignation of KPMG as our independent registered public accounting firm (See Note 2, Basis of Presentation, to the Consolidated Financial Statements for further discussion).


Net Interest Expense

Net interest expense is as follows:

Net Interest Expense

 

Year Ended

December 31,

2016

 

 

Year Ended

December 31,

2015

 

 

 

(Dollars in millions)

 

Interest expense

 

$

99.3

 

 

$

100.5

 

Interest income

 

 

(5.9

)

 

 

(5.6

)

Net Interest Expense

 

$

93.4

 

 

$

94.9

 

The decrease in net interest expense for the year ended December 31, 2016,2020 as compared to the same period in 2015,2019 was driven by $84.1 million in higher labor and benefits costs primarily driven by headcount increases to support our sales growth; $43.1 million in higher expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China (See Note 7,

Contingencies
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K);
$35.1 million in higher service fees for China independent service providers due to the payoff of our Term Loanhigher sales in March 2016. This decrease wasChina; and $12.8 million in higher foreign exchange losses; partially offset by an increase$24.4 million in interestlower Member event and promotion costs, mostly resulting from cancellations of events and promotions due to the
COVID-19
pandemic; $19.0 million of expenses relating to the SEC investigation relating to our disclosures regarding our marketing plan in China in 2019 (See Note 7,
Contingencies
, to the Consolidated Financial
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Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K);
and $17.4 million in lower travel and entertainment costs resulting from travel restrictions due to the
COVID-19
pandemic.
Other Operating Income
The $14.5 million of other operating income for the year ended December 31, 2020 consisted of $14.5 million of government grant income for China (See Note 2,
Basis of Presentation
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K)
The $37.5 million of other operating income for the year ended December 31, 2019 consisted of $31.5 million of government grant income for China and $6.0 million related to the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7,
Contingencies
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of the
2018 10-K).
Interest Expense, Net
Interest expense, from our revolving credit facilitynet was as a result of increasedfollows:
   
Year Ended
December 31,
 
   
2020
   
2019
 
   
(in millions)
 
Interest expense
  $133.0   $153.0 
Interest income
   (8.8   (20.6
  
 
 
   
 
 
 
Interest expense, net
  $124.2   $132.4 
  
 
 
   
 
 
 
The decrease in interest rates.

Other (Income) Expense, Net

There was no other (income) expense, net for the year ended December 31, 20162020 as compared to $2.3 million for the same period in 2015. The2019 was primarily due to a decrease in our overall weighted-average interest rate and weighted-average borrowings, partially offset by lower interest income earned as a result of lower interest rates.

Other Expense (Income), Net
We did not recognize any other expense (income) expense,, net for the year ended December 31, 2016, as compared to the same period in 2015, was due to no other-than-temporary impairment losses recognized during the year ended December 31, 2016 as compared to the same period in 2015 in which losses were incurred in connection with our investments in Bolivar-denominated bonds.

Income Taxes

Income taxes were $104.72020. The $15.7 million of other income, net for the year ended December 31, 2016, as compared2019 consisted of a $15.7 million gain on the revaluation of the CVR (See Note 8,

Shareholders’ Deficit
, to $147.3the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K).
Income Taxes
Income taxes were $143.8 million and $140.4 million for the same period in 2015. As a percentage of pre-tax income, theyears ended December 31, 2020 and 2019, respectively. The effective income tax rate was 28.7%27.8% and 31.1% for the yearyears ended December 31, 2016, as compared to 30.3% for the same period in 2015.2020 and 2019, respectively. The decrease toin the effective tax rate for the year ended December 31, 2016,2020 as compared to the same period in 2015, is2019 was primarily due to the increase in net benefitschanges in the geographic mix of our income. See Note 12, Income Taxes, to the Consolidated Financial Statements for additional discussion.

income, partially offset by a decrease in net benefits from discrete events.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net cash flows provided by operating activities. Variations in sales of our products directly affect the availability of funds. There are no material contractual restrictions on our ability to
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transfer and remit funds among our international affiliated companies. However, there are foreign currency restrictions in certain countries which could reduce our ability to timely obtain U.S. dollars. Even with these restrictions and the impacts of the
COVID-19
pandemic, we believe we will have sufficient resources, including cash flow from operating activities and access to capital markets, to meet debt service obligations in a timely manner and be able to continue to meet our objectives.

Historically, our debt has not resulted from the need to fund our normal operations, but instead has resulted primarily from our share repurchase programs. Since inception in 2007 through December 31, 2020, total share repurchases amounted to approximately $3.9$5.4 billion. While a significant net sales decline could potentially affect the availability of funds, many of our largest expenses are variable in nature, which we believe protects our funding in all but a dramatic net sales downturn. Our $1,278.8$1,045.4 million cash and cash equivalents as of December 31, 2020 and our senior secured credit facility, in addition to cash flow from operations, can be used to support general corporate purposes, including, any future share repurchases, dividends, and strategic investment opportunities.

We have a cash pooling arrangement with a financial institution for cash management purposes. This cash pooling arrangement allows certain of our participating subsidiaries to withdraw cash from this financial institution based upon our aggregate cash deposits held by subsidiaries who participate in the cash pooling arrangement. We did not owe any amounts to this financial institution under the pooling arrangement as of December 31, 20172020 and 2016.

2019.

For the year ended December 31, 2017,2020, we generated $590.8$628.6 million of operating cash flow as compared to $367.3$457.5 million for the same period in 2016.2019. The increase in our operating cash flow was the result of higher non-cash items and$102.4 million of favorable changes in operating assets and liabilities partially offset by lowerand $68.7 million of higher net income.income excluding

non-cash
items disclosed within our consolidated statement of cash flows. The increase in non-cash items was primarily the result of changes in deferred income taxes mainly due to the impact of the U.S. Tax Reform. The favorable$102.4 million change in operating assets and liabilities was primarily the result of favorable changes in inventories, prepaid expensesroyalty overrides and other current assets;liabilities, which included favorable changes in accrued compensation and income taxes payable; partially offset by unfavorable changes in receivables and other current liabilities. The decrease in net income was primarily the result of lower contribution margin due to lower net sales, higher interest expense from the new credit facility, and higher income taxes also mainly due to the impact of the U.S. Tax Reform; partially offset by lower selling, general, and administrative expenses mainly due to the $203.0 million regulatory settlements in 2016. The changes in our deferred income taxes related to the U.S. Tax Reform has no net impact on our operating cash flow, as it decreased our net income by $153.3 million, and increased our non-cash adjustments to net income by $153.3 million.

For the year ended December 31, 2016, we generated $367.3 million of operating cash flow, as compared to $628.7 million for the same period in 2015. The decrease in our operating cash flow was the result of lower net income, lower non-cash items, and net unfavorable changes in operating assets and liabilities. The decrease in net income was primarily the result of the $203.0 million in regulatory settlements, partially offset by lower income taxes, higher other operating income related to the government grants in China, and the arbitration award related to the re-audit. The change in operating assets and liabilities was primarily the result of changes in inventories; changes in prepaid expenses and other current assetsassets. The $68.7 million of higher net income excluding

non-cash
items was primarily relateddriven by higher contribution margin driven by higher net sales (
See Summary Financial Results
above for further discussion), partially offset by higher selling, general, and administrative expenses primarily from higher labor and benefits costs and higher expenses relating to lower prepaid non-income taxes; changesthe SEC and DOJ investigations relating to the FCPA matter in accrued expenses and accrued compensation primarily related to higher employee bonus payments; and changes in income taxes. The lower non-cash items were primarily the result of the decrease in foreign exchange losses related to Venezuela.

China.

Capital expenditures, including accrued capital expenditures, for the years ended December 31, 2017, 2016,2020 and 20152019 were $95.1 million, $144.3$116.8 million and $79.1$110.2 million, respectively. The majority of these expenditures represented investments in management information systems, including the upgrade of our Oracle enterprise wide systems which went live in August 2017, manufacturing facilities both domestically and internationally, and initiatives to develop
web-based
Member tools. We expect to incur total capital expenditures of approximately $115$175 million to $155$225 million for the full year of 2018.

2021.

In March 2017, Herbalife hosted its2020, our annual global Herbalife SummitHonors event, in Charlotte, North Carolina where President Team memberssales leaders from around the world metmeet and sharedshare best practices conductedand conduct leadership training, and Herbalifewas canceled due to the
COVID-19
pandemic. Our management awarded Members $65.2$71.3 million of Mark Hughes bonus payments related to their 20162019 performance. In March 2016, Herbalife2019, our management awarded Members $64.3$70.7 million of Mark Hughes bonus payments related to their 20152018 performance.

Senior Secured Credit Facility

In May 2015, we amended our prior senior secured credit facility, or the Prior Credit Facility, and our $700 million borrowing capacity on our prior revolving credit facility, or the Prior Revolving Credit Facility, was reduced by approximately $235.9 million, and was further reduced by approximately $39.1 million on September 30, 2015, bringing the total available borrowing capacity to $425.0 million as of December 31, 2016. We repaid in full our $500 million term loan under the Prior Credit Facility, or the Prior Term Loan, on March 9, 2016.

On February 15, 2017, we entered into a $1,450.0 million senior secured credit facility, or the 2017 Credit Facility, consisting of a $1,300.0 million term loan B, or the 2017 Term Loan B, and a $150.0 million revolving credit facility, or the 2017 Revolving Credit Facility, with a syndicate of financial institutions as lenders, or Lenders.lenders. The 2017 Revolving Credit Facility matureswas to mature on February 15, 2022 and the 2017 Term Loan maturesB was to mature on February 15, 2023. However,The 2017 Credit Facility was amended, effective March 16, 2018, to make certain technical amendments in connection with the offering of the 2024 Convertible Notes, as defined below. We terminated the 2017 Credit Facility on August 16, 2018 and the $1,178.1 million outstanding was repaid in full.
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On August 16, 2018, we entered into a $1.25 billion senior secured credit facility, or the 2018 Credit Facility, consisting of a $250.0 million term loan A, or the 2018 Term Loan A, a $750.0 million term loan B, or the 2018 Term Loan B, and a $250.0 million revolving credit facility, or the 2018 Revolving Credit Facility, with a syndicate of financial institutions as lenders. Prior to the amendment described below, the 2018 Term Loan A and 2018 Revolving Credit Facility both were to mature on August 16, 2023. The 2018 Term Loan B matures upon the earlier of: (i) August 18, 2025, or (ii) December 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $250.0$350.0 million and we exceed certain leverage ratios as of that date. All obligations under the 2018 Credit Facility are unconditionally guaranteed by certain direct and indirect wholly-owned subsidiaries of Herbalife Nutrition Ltd. and secured by the equity interests of certain of Herbalife Nutrition Ltd.’s subsidiaries and substantially all of the assets of the domestic loan parties. Also on February 14,August 16, 2018, we issued $400 million aggregate principal amount of senior unsecured notes, or 2026 Notes as described below, and used the proceeds from the 2018 Credit Facility and the 2026 Notes to repay in full the $1,178.1 million outstanding under the 2017 Credit Facility. For accounting purposes, pursuant to FASB ASC Topic 470,
Debt
, or ASC 470, these transactions were accounted for as an extinguishment of the 2017 Credit Facility. We recognized a loss on extinguishment of $35.4 million as a result, which was recorded in other expense (income), net within our consolidated statement of income for the year ended December 31, 2018.
On December 12, 2019, we amended the 2018 Credit Facility which, among other things, reduced the interest rate for borrowings under the 2018 Term Loan B. We incurred approximately $1.2 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense within our consolidated statement of income for the year ended December 31, 2019.
On March 19, 2020, we amended the 2018 Credit Facility which, among other things, extended the maturity of both the 2018 Term Loan A and 2018 Revolving Credit Facility will mature on such date. In addition,to the earlier of: (i) March 19, 2025 or (ii) September 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $250.0$350.0 million and we exceed certain leverage ratios on May 16, 2019,as of that date; increased borrowings under the 2018 Term Loan will mature on such date. TheA from $234.4 million to a total of $264.8 million; increased the total available borrowing capacity under 2018 Revolving Credit Facility from $250.0 million to $282.5 million; and reduced the interest rate for borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility. We incurred approximately $1.6 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the $1.6 million of debt issuance costs, approximately $1.1 million was recorded on our consolidated balance sheet and is secured by certain assetsbeing amortized over the life of Herbalife Ltd.the 2018 Credit Facility using the effective-interest method, and certainapproximately $0.5 million was recognized in interest expense within our consolidated statement of its subsidiaries.

income during the year ended December 31, 2020.

The 2018 Credit Facility requires us to comply with a leverage ratio. The 2018 Credit Facility also contains affirmative and negative covenants customary for financings of this type, including, among other things, limitations or prohibitions on repurchasing common shares, declaring and paying dividends and other distributions, redeeming and repurchasing certain other indebtedness, loans and investments, additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2018 Credit Facility contains customary covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make investments, disposeevents of assets, make certain restricted payments, pay dividends, repurchase our common shares, merge or consolidate and enter into certain transactions with affiliates. We are also required to maintain a minimum balance of $200.0 million of consolidated cash and cash equivalents.default. As of December 31, 20172020 and December 31, 2016,2019, we were compliantin compliance with our debt covenants under the 2018 Credit Facility and the Prior Credit Facility, respectively.

Facility.

The 2018 Term Loan isA and 2018 Term Loan B are payable in consecutive quarterly installments each in an aggregate principal amount of $24.4 million, which began on June 30, 2017.December 31, 2018. Interest is due at least quarterly on amounts outstanding onunder the 2018 Credit Facility. In addition, beginning in 2020, we may be required to make mandatory prepayments towards the 2018 Term Loan B based on our consolidated leverage ratio and annual excess cash flows as defined under the terms of the credit agreement.2018 Credit Facility. We are also permitted to make voluntary prepayments. Amounts outstanding under the 2018 Term Loan A may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. Under the 2018 Credit Facility, amounts outstanding under the 2018 Term Loan B may be voluntarily prepaid without premium or penalty,
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subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. These prepayments, if any, will be applied against remaining quarterly installments owed under the 2018 Term Loan A and 2018 Term Loan B in order of maturity with the remaining principal due upon maturity. We currently do not expect to make a mandatory prepayment towardmaturity, unless directed otherwise by us. Based on the Term Loan based on our 20172020 consolidated leverage ratio and excess cash flow calculation, both as defined under the terms of the 2018 Credit Facility.

Facility, we will not be required to make a mandatory prepayment in 2021 toward the 2018 Term Loan B.

During the year ended December 31, 2017,2020, we borrowed an aggregate amount of $30.4 million under the 2018 Credit Facility and repaid a total amount of $483.1$20.7 million which includes $410.0 million to repay in fullon amounts outstanding onunder the Prior Revolving2018 Credit Facility. During the year ended December 31, 2016,2019, we borrowed an aggregate amount of $200.0 million and paidrepaid a total amount of $429.7$20.0 million on amounts outstanding under the Prior2018 Credit Facility. As of December 31, 2017,2020 and 2019, the U.S. dollar amount outstanding under the Term Loan2018 Credit Facility was $1,226.9 million. There were no amounts$984.7 million and $975.0 million, respectively. Of the $984.7 million outstanding onunder the Revolving2018 Credit Facility as of December 31, 2017. As2020, $251.6 million was outstanding under the 2018 Term Loan A and $733.1 million was outstanding under the 2018 Term Loan B. Of the $975.0 million outstanding under the 2018 Credit Facility as of December 31, 2016, the U.S. dollar amount2019, $234.4 million was outstanding under the Prior2018 Term Loan A and $740.6 million was outstanding under the 2018 Term Loan B. There were no borrowings outstanding under the 2018 Revolving Credit Facility was $410.0 million.as of both December 31, 2020 and 2019. There were no outstanding foreign currency borrowings under the 2018 Credit Facility as of both December 31, 2020 and 2019. As of December 31, 20172020 and 2016 under2019, the Credit Facility and the Prior Credit Facility, respectively. On December 31, 2017 and December 31, 2016, the weighted averageweighted-average interest rate for borrowings under the Credit Facility and the Prior2018 Credit Facility was 6.79%3.39% and 4.29%5.52%, respectively.

respectively.

See Note 4, 5,
Long-Term Debt
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion on ourthe 2018 Credit Facility.

Convertible Senior Notes

During due 2019

In February 2014, we issued $1.15 billion aggregate principal amount of convertible senior notes due 2019, or the 2019 Convertible Notes. The 2019 Convertible Notes arewere senior unsecured obligations which rankranked effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2019 Convertible Notes paypaid interest at a rate of 2.00% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2014. TheUnless earlier repurchased or converted, the 2019 Convertible Notes maturematured on August 15, 2019, unless earlier repurchased or converted.2019. The primary purpose of the issuance of the 2019 Convertible Notes was for share repurchase purposes.
In March 2018, we issued $550 million aggregate principal of new convertible senior notes due 2024 as described below, and subsequently used the proceeds, along with cash on hand, to repurchase $475.0 million of our existing 2019 Convertible Notes from a limited number of holders in privately negotiated transactions for an aggregate purchase price of $583.5 million, which included $1.0 million of accrued interest.
In August 2019, we repaid a total amount of $675.0 million to repay in full amounts outstanding on the 2019 Convertible Notes upon maturity, as well as $6.7 million of accrued interest. See Note 4, 5,
Long-Term Debt
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion on our 2019 Convertible Notes.

Convertible Senior Notes due 2024
In March 2018, we issued $550.0 million aggregate principal amount of convertible senior notes due 2024, or the 2024 Convertible Notes. The 2024 Convertible Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2024 Convertible Notes pay interest at a rate of 2.625% per annum payable semiannually in arrears on March 15
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and September 15 of each year, beginning on September 15, 2018. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature on March 15, 2024. The primary purpose of the issuance of the 2024 Convertible Notes was to repurchase a portion of the 2019 Convertible Notes. See Note 5,
Long-Term Debt
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion on our 2024 Convertible Notes.
Senior Notes due 2025
In May 2020, we issued $600.0 million aggregate principal amount of senior notes due 2025, or the 2025 Notes. The 2025 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2025 Notes pay interest at a rate of 7.875% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes mature on September 1, 2025, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2025 Notes was for general corporate purposes, including share repurchases and other capital investment projects. See Note 5,
Long-Term Debt
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion on our 2025 Notes.
Senior Notes due 2026
In August 2018, we issued $400.0 million aggregate principal amount of senior notes due 2026, or the 2026 Notes. The 2026 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2026 Notes pay interest at a rate of 7.250% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2019. The 2026 Notes mature on August 15, 2026, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2026 Notes was to refinance a portion of our 2017 Credit Facility. See Note 5,
Long-Term Debt
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion on our 2026 Notes.
Contractual Obligations

The following summarizes our contractual obligations, including interest, as of December 31, 2017,2020, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

 

 

Payments Due by Period

 

 

 

Total

 

 

2018

 

 

2019 - 2020

 

 

2021 - 2022

 

 

2023 &

Thereafter

 

 

 

(Dollars in millions)

 

Convertible senior notes

 

$

1,196.0

 

 

$

23.0

 

 

$

1,173.0

 

 

$

 

 

$

 

Borrowings under the senior secured credit facility(1)

 

 

1,590.4

 

 

 

182.8

��

 

 

344.8

 

 

 

316.7

 

 

 

746.1

 

Operating leases

 

 

229.0

 

 

 

51.6

 

 

 

72.9

 

 

 

31.3

 

 

 

73.2

 

Purchase obligations and other commitments

 

 

161.1

 

 

 

125.6

 

 

 

23.8

 

 

 

11.7

 

 

 

 

Total(2)

 

$

3,176.5

 

 

$

383.0

 

 

$

1,614.5

 

 

$

359.7

 

 

$

819.3

 

   
Payments Due by Period
 
   
Total
   
2021
   
2022 -
2023
   
2024 -
2025
   
2026 &
Thereafter
 
   
(in millions)
 
Convertible senior notes due 2024
   600.5    14.4    28.9    557.2    —   
Senior notes due 2025
   848.5    59.3    94.5    694.7    —   
Senior notes due 2026
   574.0    29.0    58.0    58.0    429.0 
Borrowings under the senior secured credit facility(1)
   1,106.8    48.9    108.8    949.1    —   
Operating leases
   329.0    45.8    85.8    60.7    136.7 
Purchase obligations and other commitments
   251.2    225.5    24.9    0.8    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total(2)
  $3,710.0   $422.9   $400.9   $2,320.5   $565.7 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 

(1)

The estimated interest payments on our 2018 Credit Facility are based on interest rates effective as of December 31, 2017.

2020.
71

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(2)

Our consolidated balance sheet as of December 31, 2017 included $55.82020 includes $60.1 million in unrecognized tax benefits. The future payments related to these unrecognized tax benefits have not been presented in the table above due to the uncertainty of the amounts and potential timing of cash settlements with the tax authorities and whether any settlement would occur.

Cash and Cash Equivalents

The majority of our foreign subsidiaries designate their local currencies as their functional currencies. As of December 31, 2017 and December 31, 2016,2020, the total amount of our foreign subsidiary cash and cash equivalents was $1,133.5$463.4 million, and $316.2 million, respectively, of which $633.3$31.4 million and $28.2 million, respectively, was investedheld in U.S. dollars. The increase in our foreign subsidiary U.S. dollar denominated cash and cash equivalents primarily relates to our borrowings from our Credit Facility executed on February 15, 2017. As of December 31, 2017 and December 31, 2016,2020, the total amount of cash and cash equivalents held by our parentHerbalife Nutrition Ltd. and its U.S. entities, inclusive of U.S. territories, was $145.3 million and $527.8 million, respectively.

$582.0 million.

For earnings not considered to be indefinitely reinvested deferred taxes have been provided. For earnings considered to be indefinitely reinvested, deferred taxes have not been provided. Should we make a determination to remit the cash and cash equivalents from our foreign subsidiaries that are considered indefinitely reinvested to our U.S. consolidated group for the purpose of repatriation of undistributed earnings, we would need to accrue and pay taxes. As of December 31, 2017,2020, our U.S. consolidated group had approximately $97.9$147.7 million of permanently reinvested unremitted earnings from certain foreign subsidiaries, and if these monies were ever needed to be remitted, the impact of any tax consequences on our overall liquidity position would not be material. As of December 31, 2017, our parent,2020, Herbalife Nutrition Ltd., had $2.4approximately $2.6 billion of permanently reinvested unremitted earnings relating to its operating subsidiaries. As a result of our decision to invest in the China Growth and Impact Investment Program, approximately $113.9 million of unremitted earnings were permanently reinvested as of December 31, 2017,2020. As of December 31, 2020, we do not have any plans to repatriate these unremitted earnings to our parent;Herbalife Nutrition Ltd.; therefore, we do not have any liquidity concerns relating to these unremitted earnings and related cash and cash equivalents. See Note 12,

Income Taxes
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for additional discussion on our unremitted earnings.

Off-Balance
Sheet Arrangements

As of December 31, 20172020 and December 31, 2016,2019, we had no material
off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.

Dividends

We have not declared or paid cash dividends since 2014. The declaration of future dividends is subject to the discretion of our board of directors and will depend upon various factors, including our earnings, financial condition, Herbalife Nutrition Ltd.’s available distributable reserves under Cayman Islands law, restrictions imposed by the 2018 Credit Facility and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects, and other factors deemed relevant by our board of directors.

directors.

On November 4, 2020, our Board of Directors declared a pro rata distribution of stock purchase warrants to our shareholders of one warrant for every four common shares held. Each warrant would have entitled the holder to purchase an Herbalife Nutrition common share at an exercise price of $67.50 per share where we would have had the option to net share settle these warrants if they were exercised in the future. On November 10, 2020, our Board of Directors announced that, after considering additional feedback from our shareholders, we will no longer move forward with our intended distribution of warrants.
Share Repurchases

On February 21, 2017,October 30, 2018, our board of directors authorized a new three-yearfive-year $1.5 billion share repurchase program that will expire on February 21, 2020,October 30, 2023, which replaced our prior share repurchase authorization whichthat was set to expire on June 30, 2017 which, as of December 31, 2016,February 21, 2020 and had approximately $233$113.3 million of remaining authorized capacity.capacity when it was replaced. This share repurchase program allows us, which includes an indirect whollywholly-owned subsidiary of
72

Table of Contents
Herbalife Nutrition Ltd., to repurchase our common shares at such times and prices as determined by management, as market conditions warrant.warrant, and to the extent Herbalife Nutrition Ltd.’s distributable reserves are available under Cayman Islands law. The 2018 Credit Facility permits us to repurchase our common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met.

As of December 31, 2020, the remaining authorized capacity under our $1.5 billion share repurchase program was $607.9 million.

In conjunction with the issuance of the 2019 Convertible Notes during February 2014, we paid approximately $685.8 million to enter into prepaid forward share repurchase transactions, or the Forward Transactions, with certain financial institutions, or the Forward Counterparties, pursuant to which we purchased approximately 9.919.9 million common shares, at an average cost of $69.02$34.51 per share, for settlement on or around the August 15, 2019 maturity date for the 2019 Convertible Notes, subject to the ability of each Forward Counterparty to elect to settle all or a portion of its Forward Transactions early. The shares are treated as retired shares for basic and diluted EPS purposes although they remain legally outstanding.purposes. See Note 8,
Shareholders’ (Deficit) EquityDeficit
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion on the Forward Transactions.

During

In August 2020, we completed our modified Dutch auction tender offer and then subsequently paid cash to repurchase and retire a total of approximately 15.4 million of our common shares at an aggregate cost of approximately $750.0 million, or $48.75 per share. In addition, during the year ended December 31, 2017, one of our indirect wholly owned subsidiaries purchased2020, we repurchased approximately 5.03.0 million of our common shares through open market purchases at an aggregate cost of approximately $328.6$142.1 million, or an average cost of $65.61$47.40 per share.share, and subsequently retired these shares. During the year ended December 31, 2019, we did not repurchase any of our common shares through open market purchases.
As of both December 31, 2020 and 2019, we held approximately 10.0 million of treasury shares for U.S. GAAP purposes. These share repurchases reducedtreasury shares increased our total shareholders’ equitydeficit and are reflected at cost within our accompanying consolidated balance sheet.sheets. Although these shares are owned by an indirect wholly ownedwholly-owned subsidiary of us,ours and remain legally outstanding, they are reflected as treasury shares under U.S. GAAP and therefore reduce the number of common shares outstanding within our consolidated financial statements and the weighted-average number of common shares outstanding used in calculating earnings per share. OurThe common shares of Herbalife Nutrition Ltd. held by the indirect wholly ownedwholly-owned subsidiary, however, remain outstanding on the books and records of our transfer agent and therefore still carry voting and other share rights related to ownership of our common shares, which may be exercised. So long as it is consistent with applicable laws, such shares will be voted by such subsidiary in the same manner, and to the maximum extent possible in the same proportion, as all other votes cast with respect to any matter properly submitted to a vote of ourHerbalife Nutrition Ltd.’s shareholders. As of December 31, 2017, we held approximately 5.0 million of treasury shares for U.S. GAAP purposes. In October 2017, our parent completed its modified Dutch auction tender offer and then subsequently paid cash to repurchase and retire a total of approximately 6.7 million of our common shares at an aggregate cost of approximately $457.8 million, or $68.00 per share. In total, we repurchased 11.7 million of our common shares at an aggregate cost of approximately $786.4 million, or an average cost of $66.98 per share, during the year ended December 31, 2017. We did not repurchase any of our common shares in the open market during the years ended December 31, 2016 and 2015. As of December 31, 2017, the remaining authorized capacity under our $1.5 billion share repurchase program was $713.6 million.
See Note 8,
Shareholders’ (Deficit) EquityDeficit
, and Note 15,
Subsequent Events
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion on our share repurchases.


In connection with theour October 2017 modified Dutch auction tender offer, we incurred $1.6 million in transaction costs and also provided a

non-transferable contractual
CVR for each share tendered, allowing participants in the tender offer to receive a contingent cash payment in the event we areHerbalife is acquired in a going-private transaction (as defined in the CVR Agreement) within two years of the commencement of the tender offer. The initial fair value of the CVR was $7.3 million, which was recorded as a liability in the fourth quarter of 2017 with a corresponding decrease to shareholders’ equity. In determining the initial fair value of the CVR, we used a lattice model, which included inputs such as the underlying stock price, strike price, time to expiration, and dividend yield. Subsequent changes in the fair value of the CVR liability, using a similar valuation approach as the initial fair value determination, arewere recognized within our consolidated balance sheetsheets with corresponding gains or losses being recognized in non-operatingother expense (income), net within our consolidated statements of income during each reporting period until the CVR expiresexpired in August 2019 or iswas terminated due to a going-private transaction. Astransaction, which was also
73

Table of December 31, 2017,Contents
incorporated in the valuation of the CVR; this going-private probability input was considered to be a Level 3 input in the fair value hierarchy and any increase or decrease in this input could have significantly impacted the fair value of the CVR as of the reporting date. The CVR expired without value on August 21, 2019, the
two-year
anniversary of August 21, 2017, the date we commenced the related modified Dutch auction tender offer.
During the year ended December 31, 2019, we recognized a $15.7 million gain in other expense (income), net within our consolidated statement of income due to the change in the fair value of the CVR, which was $6.9 million.

driven by its expiration during August 2019. During the year ended December 31, 2018, we recognized an $8.8 million loss in other expense (income), net within our consolidated statement of income due to the change in the fair value of the CVR, which was primarily driven by an increase in the market price of our common shares, partially offset by a decrease in the probability of a going-private transaction as a result of the shortening term of the CVR before it expired pursuant to its terms.

See Note 8,
Shareholders’ Deficit
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K,
for a further discussion on the CVR.
Capped Call Transactions

In February 2014, in connection with the issuance of the 2019 Convertible Notes, we paid approximately $123.8 million to enter into capped call transactions with respect to our common shares, or the Capped Call Transactions, with certain financial institutions. The Capped Call Transactions arewere expected generally to reduce the potential dilution upon conversion of the 2019 Convertible Notes in the event that the market price of the common shares iswas greater than the strike price of the Capped Call Transactions, initially set at $86.28$43.14 per common share, with such reduction of potential dilution subject to a cap based on the cap price initially set at $120.79$60.39 per common share.
During March 2018, in connection with our repurchase of a portion of the 2019 Convertible Notes, we entered into partial settlement agreements with the option counterparties to the Capped Call Transactions to terminate a portion of the Capped Call Transactions, in each case, in a notional amount corresponding to the aggregate principal amount of the 2019 Convertible Notes that were repurchased.
On August 15, 2019, the 2019 Convertible Notes matured and the remaining Capped Call Transactions expired unexercised. The expiration of the Capped Call Transactions did not have an impact on our consolidated financial statements. See Note 8,
Shareholders’ (Deficit) EquityDeficit
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion of the Capped Call Transactions.

Working Capital and Operating Activities

As of December 31, 20172020 and December 31, 2016,2019, we had positive working capital of $953.5$648.5 million and $671.0$523.8 million, respectively, or an increase of $282.5$124.7 million. ThisThe increase was primarily due to the increaseincreases in cash and cash equivalents;equivalents and inventories, partially offset by decreasesincreases in inventories, and prepaid expensesroyalty overrides and other current assets; and the increase in the current portion of long-term debt primarily related to the Credit Facility entered into on February 15, 2017.

liabilities.

We expect that cash and funds provided from operations, available borrowings under the 2018 Credit Facility, and access to capital markets will provide sufficient working capital to operate our business, to make expected capital expenditures, and to meet foreseeable liquidity requirements including payment of amounts outstanding under the Credit Facility, for the next twelve months and thereafter.

The majority of our purchases from suppliers are generally made in U.S. dollars, while sales to our Members generally are made in local currencies. Consequently, strengthening of the U.S. dollar versus a foreign currency can have a negative impact on net sales and contribution margins and can generate transaction gains or losses on intercompany transactions. For discussion of our foreign exchange contracts and other hedging arrangements, see Part II, Item 7A,
Quantitative and Qualitative Disclosures about Market Risk.

, of this Annual Report on Form 10-K.

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Table of Contents
Quarterly Results of Operations

 

 

Quarter Ended

 

 

 

December 31,

2017

 

 

September 30,

2017

 

 

June 30,

2017

 

 

March 31,

2017

 

 

December 31,

2016

 

 

September 30,

2016

 

 

June 30,

2016

 

 

March 31,

2016

 

 

 

(In millions except per share data)

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,093.3

 

 

$

1,085.4

 

 

$

1,146.9

 

 

$

1,102.1

 

 

$

1,045.0

 

 

$

1,122.0

 

 

$

1,201.8

 

 

$

1,119.6

 

Cost of sales

 

 

209.8

 

 

 

215.4

 

 

 

218.8

 

 

 

204.6

 

 

 

196.1

 

 

 

209.1

 

 

 

236.3

 

 

 

213.1

 

Gross profit

 

 

883.5

 

 

 

870.0

 

 

 

928.1

 

 

 

897.5

 

 

 

848.9

 

 

 

912.9

 

 

 

965.5

 

 

 

906.5

 

Royalty overrides

 

 

310.1

 

 

 

310.1

 

 

 

318.9

 

 

 

315.1

 

 

 

303.7

 

 

 

320.3

 

 

 

336.7

 

 

 

311.9

 

Selling, general and

    administrative expenses

 

 

431.6

 

 

 

445.2

 

 

 

443.2

 

 

 

438.6

 

 

 

421.7

 

 

 

441.3

 

 

 

676.8

 

 

 

427.1

 

Other operating income

 

 

(7.3

)

 

 

(4.6

)

 

 

(38.9

)

 

 

 

 

 

(34.7

)

 

 

(0.2

)

 

 

(28.1

)

 

 

(0.8

)

Operating income

 

 

149.1

 

 

 

119.3

 

 

 

204.9

 

 

 

143.8

 

 

 

158.2

 

 

 

151.5

 

 

 

(19.9

)

 

 

168.3

 

Interest expense, net

 

 

39.8

 

 

 

38.4

 

 

 

37.9

 

 

 

30.2

 

 

 

23.3

 

 

 

22.1

 

 

 

23.1

 

 

 

24.9

 

Other (income) expense, net

 

 

(0.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

109.7

 

 

 

80.9

 

 

 

167.0

 

 

 

113.6

 

 

 

134.9

 

 

 

129.4

 

 

 

(43.0

)

 

 

143.4

 

Income taxes

 

 

173.1

 

 

 

26.4

 

 

 

29.4

 

 

 

28.4

 

 

 

35.5

 

 

 

41.7

 

 

 

(20.1

)

 

 

47.6

 

Net (loss) income

 

$

(63.4

)

 

$

54.5

 

 

$

137.6

 

 

$

85.2

 

 

$

99.4

 

 

$

87.7

 

 

$

(22.9

)

 

$

95.8

 

(Loss) Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.87

)

 

$

0.69

 

 

$

1.69

 

 

$

1.03

 

 

$

1.19

 

 

$

1.06

 

 

$

(0.28

)

 

$

1.16

 

Diluted

 

$

(0.87

)

 

$

0.66

 

 

$

1.61

 

 

$

0.98

 

 

$

1.16

 

 

$

1.01

 

 

$

(0.28

)

 

$

1.12

 

Weighted average shares

    outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

72.9

 

 

 

79.6

 

 

 

81.4

 

 

 

83.1

 

 

 

83.2

 

 

 

83.1

 

 

 

83.0

 

 

 

82.8

 

Diluted

 

 

72.9

 

 

 

83.0

 

 

 

85.3

 

 

 

86.7

 

 

 

86.0

 

 

 

86.4

 

 

 

83.0

 

 

 

85.6

 

  
Quarter Ended
  
December 31,
2020
 
September 30,
2020
 
June 30,
2020
 
March 31,
2020
 
December 31,
2019(1)
 
September 30,
2019
 
June 30,
2019
 
March 31,
2019
  
(in millions, except per share amounts)
Net sales
  $1,410.7  $1,521.8  $1,346.9  $1,262.4  $1,220.3  $1,244.5  $1,240.1  $1,172.2
Cost of sales
   309.4   322.7   272.8   245.7   229.8   243.4   243.2   241.6
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   1,101.3   1,199.1   1,074.1   1,016.7   990.5   1,001.1   996.9   930.6
Royalty overrides
   438.9   463.1   406.9   381.2   358.1   363.8   366.8   359.5
Selling, general, and administrative expenses
   515.5   529.7   480.8   549.0   527.8   500.1   477.0   435.4
Other operating income
   (1.5)   (0.6)   (3.3)   (9.1)   (3.8)   (6.4)   —     (27.3)
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
   148.4   206.9   189.7   95.6   108.4   143.6   153.1   163.0
Interest expense, net
   35.2   35.2   28.8   25.0   28.4   31.6   36.3   36.1
Other expense (income), net
   —     —     —     —     —     (1.3)   (5.9)   (8.5)
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Income before income taxes
   113.2   171.7   160.9   70.6   80.0   113.3   122.7   135.4
Income taxes
   39.4   33.6   45.8   25.0   23.3   31.8   46.2   39.1
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
  $73.8  $138.1  $115.1  $45.6  $56.7  $81.5  $76.5  $96.3
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Earnings per share:
                
Basic
  $0.61  $1.07  $0.84  $0.33  $0.41  $0.59  $0.56  $0.70
Diluted
  $0.59  $1.04  $0.82  $0.32  $0.40  $0.58  $0.54  $0.66
Weighted-average shares outstanding:
                
Basic
   121.3   129.2   137.9   137.8   137.5   137.4   137.4   137.1
Diluted
   124.3   132.5   140.1   140.2   140.8   140.0   142.4   145.5
(1)
The fourth quarter of 2019 includes a net favorable adjustment to our unrecognized tax benefit liability of $11.4 million primarily attributable to transfer pricing matters in various foreign jurisdictions, and a legal accrual of $40 million relating to the SEC and DOJ investigations relating to the FCPA matter in China as described further in Note 7,
Contingencies
,
to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K.
Contingencies

See Note 7,
Contingencies
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for information on our contingencies as of December 31, 2017.

2020.

Subsequent Events

See Note 15,
Subsequent Events
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for information regarding subsequent events.

events, including the $600 million share repurchase agreement that was entered into on January 3, 2021.

75

Table of Contents
Critical Accounting Policies

U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. We regularly evaluate our estimates and assumptions related to revenue recognition, allowance for product returns, inventory, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing the financial statements and the uncertainties that could impact our operating results, financial condition and cash flows.


We are a nutrition company that sells a wide range of weight management,management; targeted nutrition,nutrition; energy, sports, & fitness,and fitness; and outer nutrition products. Our products are manufactured by us in our Changsha, Hunan, China extraction facility, Suzhou, China facility, Nanjing, China facility, Lake Forest, California facility, and in our Winston-Salem, North Carolina facility, and by third partythird-party providers, and then are sold to Members who consume and sell Herbalife products to retail consumers or other Members. As of December 31, 2017,2020, we sold products in 94 countries95 markets throughout the world and we are organized and managed by geographic region. We aggregate our operating segments into one reporting segment, except China, as management believes that our operating segments have similar operating characteristics and similar long termlong-term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, the nature of the regulatory environment, and their economic characteristics.

We generally recognize revenue upon delivery and when both the title and risk and rewards passcontrol passes to the Member or importer, or as products are sold in China to and through independent service providers, sales representatives, and sales officers to customers and preferred customers, as well as through Company-operated retail stores when necessary.Member. Product sales are recognized net of product returns, and discounts referred to as “distributor allowances.” We generally receive the net sales price in cash or through credit card payments at the point of sale. Royalty overrides are generally recorded when revenue is recognized. See Note 2,
Basis of Presentation
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion of distributor compensation in the U.S.

Allowances for product returns, primarily in connection with our buyback program, are provided at the time the sale is recorded. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months following the original sale. Historically, product returns and buybacks have not been significant. Product returns and buy backsbuybacks were approximately 0.1% of productnet sales for eachboth of the years ended December 31, 2017, 2016,2020 and 2015.

2019.

We adjust our inventories to lower of cost and net realizable value. Additionally we adjust the carrying value of our inventory based on assumptions regarding future demand for our products and market conditions. If future demand and market conditions are less favorable than management’s assumptions, additional inventory write-downs could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously written down inventories are sold. We have obsolete and slow moving inventories, which have been adjusted downward $30.8$23.0 million and $25.5$15.1 million to present them at their lower of cost and net realizable value in our consolidated balance sheets as of December 31, 20172020 and December 31, 2016,2019, respectively.

Goodwill and marketing relatedmarketing-related intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to
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As part of the extent that the carrying amount exceeds the asset’s fair value. As discussed below, forannual goodwill impairment testing,test, which is performed at the reporting unit level, we have the option to perform a qualitativemay conduct an assessment of qualitative factors to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If we conclude it is not more likely than not that the fair value of a reporting unit is less than its carrying amount,amount. In a qualitative assessment, we would consider the macroeconomic conditions, including any deterioration of general conditions and industry and market conditions, including any deterioration in the environment where the reporting unit operates, increased competition, changes in the products/services and regulatory and political developments, cost of doing business, overall financial performance, including any declining cash flows and performance in relation to planned revenues and earnings in past periods, other relevant reporting unit specific facts, such as changes in management or key personnel or pending litigation, and events affecting the reporting unit, including changes in the carrying value of net assets. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then there is no need towe would perform the two-stepquantitative goodwill impairment test. Currently,test as required. If we dodetermine that it is not use thismore likely than not that the fair value of the reporting unit is less than the carrying value, then no further testing is required. During fiscal year 2020, we performed a qualitative assessment option but we could inand determined that it is not more likely than not that the future elect to use this option. fair value of each reporting unit is less than its respective carrying value.
For our marketing relatedmarketing-related intangible assets, we may also utilize a qualitative assessment similar to the one described above, with the exception that the test is performed at the consolidated level rather than at the reporting unit level. During fiscal year 2020, we performed a qualitative optionassessment of our marketing-related intangible assets and determined that it is also currently available. However,not more likely than not that the fair value of the assets is less than their carrying value.
If we currently use a discounted cash flow model, or the income approach, under the relief-from-royalty methodare required to determine the fair value of our marketing related intangible assets in order to confirm there is no impairment required. For our marketing related intangible assets, ifeach reporting unit using the quantitative method, we do not use this qualitative assessment option, we could still in the future elect to use this option.


In order to estimate the fair value of goodwill, we also primarily use an income approach. The determination of impairment is made at the reporting unit level and consists of two steps. First, weapproach in order to determine the fair value of a reporting unit and compare it to its carrying amount. The determination of the fair value of the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions include estimates of future revenues and expense growth rates, capital expenditures and the depreciation and amortization related to these capital expenditures, discount rates, and other inputs. Due to the inherent uncertainty involved in making these estimates, actual future results could differ. Changes in assumptions regarding future results or other underlying assumptions could have a significant impact on the fair value of the reporting unit. Second, ifIf the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill and other intangiblesunit over the impliedits fair value as determined in Step 2 of the goodwill impairment test. Also, if during Step 1 of a goodwill impairment testvalue.

If we are required to determine we have reporting units with zero or negative carrying amounts, then we perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. During Step 2 of a goodwill impairment test, the implied fair value of goodwill is determined in a similar manner as how the amount of goodwill recognized in a business combination is determined, in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 805, Business Combinations. We would assign the fair value of our marketing-related intangible assets using the quantitative method, we use a reporting unitdiscounted cash flow model, or the income approach, under the relief-from-royalty method to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination anddetermine the fair value of our marketing related intangible assets in order to confirm there is no impairment required. An impairment loss is recognized to the reporting unit wasextent that the price paid to acquire the reporting unit. The excesscarrying amount of the assets exceeds their fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. value.
As of December 31, 20172020 and December 31, 2016,2019, we had goodwill of approximately $96.9$100.5 million and $89.9$91.5 million, respectively.respectively, or an increase of $9.0 million. Of the $9.0 million increase, $7.0 million was due to an immaterial acquisition and $2.0 million was due to foreign currency translation adjustments. As of both December 31, 20172020 and December 31, 2016,2019, we had marketing-related intangible assets of approximately $310.0 million. The increase in goodwill during the year ended December 31, 2017 was due to cumulative translation adjustments. No marketing-related intangibles or goodwill impairment was recorded during the years ended December 31, 2017, 2016,2020 and 2015.

2019. See Note 2,

Basis of Presentation
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion.
Contingencies are accounted for in accordance with Financial Accounting Standards Board, or FASB Accounting Standards Codification, or ASC Topic 450,
Contingencies,
or ASC 450. ASC 450 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible as required by ASC 450. Accounting for contingencies such as legal and
non-income
tax matters requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many of these legal and tax contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases.

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We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. Although realization is not assured, we believe it is more likely than not that the net carrying value will be realized. The amount of the carryforwards that is considered realizable, however, could change if estimates of future taxable income are adjusted. In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax determination is uncertain. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to us actually preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual
pre-tax
income can affect the overall effective income tax rate.

We account for uncertain tax positions in accordance with FASB ASC Topic 740,
Income Taxes,
or ASC 740, which provides guidance on the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.


On December 22, 2017, the U.S. enacted the 2017 Tax Cuts and Jobs Act of 2017, or U.S. Tax Reform, which contains several key tax provisions that affect the Company,us, including, but not limited to, a

one-time
mandatory transition tax on accumulated foreign earnings, changes in the sourcing and calculation of foreign income, and a reduction of the corporate income tax rate to 21% effective January 1, 2018. The Company isWe are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring itsour U.S. deferred tax assets and liabilities as well as reassessing the net realizability of itsour deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
, which allows the Companyus to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. See Note 12,
Income Taxes
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a further discussion of the U.S. Tax Reform.

We have made an accounting policy election to account for global intangible

low-taxed
income as a period cost if and when incurred.
We account for foreign currency transactions in accordance with FASB ASC Topic 830,
Foreign Currency Matters
. In a majority of the countries where we operate, the functional currency is the local currency. Our foreign subsidiaries’ asset and liability accounts are translated for consolidated financial reporting purposes into U.S. dollar amounts at
period-end
exchange rates. Revenue and expense accounts are translated at the average rates during the year. Our foreign exchangecurrency translation adjustments are included in accumulated other comprehensive loss on our accompanying consolidated balance sheets. Foreign currency transaction gains and losses and foreign currency remeasurements are generally included in selling, general, and administrative expenses in the accompanying consolidated statements of income.

New Accounting Pronouncements

See discussion under Note 2,
Basis of Presentation
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for information on new accounting pronouncements.

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Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitat
ive Disclosures
About
Market Risk

We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign currency exchange rates. On a selected basis, we use derivative financial instruments to manage or hedge certain of these risks. All hedging transactions are authorized and executed pursuant to written guidelines and procedures.

We apply FASB ASC Topic 815,
Derivatives and Hedging,
or ASC 815, which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the underlying hedged item are recognized concurrently in earnings. If the derivative is designated as a cash-flowcash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the consolidated statements of income when the hedged item affects earnings. ASC 815 defines the requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value are recognized concurrently in earnings.

A discussion of our primary market risk exposures and derivatives is presented below.

Foreign Exchange Risk

We transact business globally and are subject to risks associated with changes in foreign exchange rates. Our objective is to minimize the impact to earnings and cash flow associated with foreign exchange rate fluctuations. We enter into foreign exchange derivatives in the ordinary course of business primarily to reduce exposure to currency fluctuations attributable to intercompany transactions, translation of local currency earnings, inventory purchases subject to foreign currency exposure, and to partially mitigate the impact of foreign currency rate fluctuations. Due to volatility in foreign exchange markets, our current strategy, in general, is to hedge some of the significant exposures on a short-term basis. We will continue to monitor the foreign exchange markets and evaluate our hedging strategy accordingly. With the exception of our foreign exchangecurrency forward contracts relating to forecasted inventory purchases and intercompany management fees discussed below, all of our foreign exchange contracts are designated as free standingfreestanding derivatives for which hedge accounting does not apply. The changes in the fair value of the derivatives not qualifying as cash flow hedges are included in selling, general, and administrative expenses inwithin our consolidated statements of income.

The foreign exchangecurrency forward contracts and option contracts designated as free standingfreestanding derivatives are primarily used to hedge advances between subsidiariesforeign currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The fair value of foreign exchange derivative contracts is based on third-party quotes. Our foreign currency derivative contracts are generally executed on a monthly basis.


We also purchase foreign currency forward contracts in order to hedge forecasted inventory transactions and intercompany management fees that are designated as cash-flowcash flow hedges and are subject to foreign currency exposures. We applied the hedge accounting rules as required by ASC 815 for these hedges. These contracts allow us to buy and sell certain currencies at specified contract rates. As of December 31, 20172020 and December 31, 2016,2019, the aggregate notional amounts of these contracts outstanding were approximately $104.9$56.4 million and $90.0$66.4 million, respectively. As of December 31, 2017,2020, the outstanding contracts were expected to mature over the next fifteen months. Our derivative financial instruments are recorded on the consolidated balance sheetsheets at fair value based on quoted market rates. For the forecasted inventory transactions, the forward contracts are used to hedge forecasted inventory transactions over specific months. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss)loss within shareholders’ (deficit) equity,deficit, and are recognized in cost of sales in thewithin our consolidated statementsstatement of income during the period which approximates the time the hedged inventory is sold. We also hedge
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forecasted intercompany management fees over specific months. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, are recorded as a component of accumulated other comprehensive income (loss)loss within shareholders’ (deficit) equity,deficit, and are recognized in selling, general, and administrative expenses in thewithin our consolidated statementsstatement of income induring the period when the hedged item and underlying transaction affectsaffect earnings. As of December 31, 2017,2020, we recorded assets at fair value of $2.9 millionand liabilities at fair value of $4.0$3.9 million relating to all outstanding foreign currency contracts designated as cash-flowcash flow hedges. As of December 31, 2016,2019, we recorded assets at fair value of $4.6$0.1 million and liabilities at fair value of $1.9 million relating to all outstanding foreign currency contracts designated as cash-flowcash flow hedges. During the years ended December 31, 2017 and 2016, the ineffective portion relating to these hedges was immaterial and theThese hedges remained effective as of December 31, 20172020 and 2019.
As of both December 31, 2016.

As of December 31, 20172020 and December 31, 2016,2019, the majority of our outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within one month as of December 31, 2017 and December 31, 2016, respectively.

month.

See Note 11,
Derivative Instruments and Hedging Activities
, to the Consolidated Financial Statements included in Part IV, Item 15,
Exhibits, Financial Statement Schedules
, of this Annual Report on
Form 10-K
for a description of foreign currency forward contracts that were outstanding as of December 31, 20172020 and 2016,2019, which discussion is incorporated herein by reference.

The majority of our foreign subsidiaries designate their local currencies as their functional currencies. See
Liquidity and Capital Resources — Cash and cash equivalentsCash Equivalents
in Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, of this Annual Report on Form 10-K for further discussion of our foreign subsidiary cash and cash equivalents.

Interest Rate Risk

As of December 31, 2017,2020, the aggregate annual maturities of the 2018 Credit Facility were expected to be $97.5 million for 2018, $97.5 million for 2019, $97.5 million for 2020, $97.5$20.7 million for 2021, $97.5$27.4 million for 2022, and $739.4$27.4 million for 2023.2023, $34.0 million for 2024, and $875.2 million for 2025. As of December 31, 2017,2020, the fair valuevalues of the 2018 Term Loan wasA and 2018 Term Loan B were approximately $1,226.1$251.9 million and $734.0 million, respectively, and the carrying value was $1,190.2 million.values were $250.5 million and $726.0 million, respectively. As of December 31, 2019, the fair values of the 2018 Term Loan A and 2018 Term Loan B were approximately $235.7 million and $744.8 million, respectively, and the carrying values were $233.2 million and $732.1 million, respectively. There were no outstanding borrowings on the 2018 Revolving Credit Facility as of December 31, 2017.2020 and 2019. The fair value of the Prior2018 Credit Facility approximated its carrying value of $410.0 millionbears variable interest rates, and as of December 31, 2016. The2020 and 2019, the weighted-average interest rate for borrowings under the 2018 Credit Facility bearswas 3.39% and 5.52%, respectively.
During the Priorfirst quarter of 2020, we entered into various interest rate swap agreements with effective dates ranging between February 2020 and March 2020. These agreements collectively provide for us to pay interest at a weighted-average fixed rate of 0.98% on aggregate notional amounts of $100.0 million under the 2018 Credit Facility bore variableuntil their respective expiration dates ranging between February 2022 and March 2023, while receiving interest based on LIBOR on the same notional amounts for the same periods. At inception, these swap agreements were designated as cash flow hedges against the variability in certain LIBOR-based borrowings under the 2018 Credit Facility, effectively fixing the interest rate on such notional amounts at a weighted-average effective rate of 3.48%. The fair values of the interest rate swap agreements are based on third-party bank quotes, and as of December 31, 2020, we recorded liabilities at fair value of $1.0 million relating to these interest rate swap agreements.
Our exposure to interest rate volatility risk related to our 2018 Credit Facility is partially mitigated by our interest rate swaps. If interest rates were to increase or decrease by 1% for the year and our borrowing amounts on December 31, 2017 and December 31, 2016, the weighted average interest rate of theour 2018 Credit Facility and the Priorrelated interest rate swaps remained constant, our annual interest expense could increase by approximately $8.8 million or decrease by approximately $1.3 million. The variable interest rates
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payable under our 2018 Credit Facility was 6.79%are linked to LIBOR as the benchmark for establishing such rates. Recent national, international and 4.29%, respectively. other regulatory guidance and reform proposals regarding LIBOR are requiring certain LIBOR tenors to be discontinued or become unavailable by the end of 2021 and LIBOR to be fully discontinued or become unavailable as a benchmark rate by June 2023. Our 2018 Credit Facility includes mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use in place of LIBOR which may result in interest rates that are higher or lower than those that would have resulted had LIBOR remained in effect.
As of December 31, 20172020, the fair value of the liability component of our $1.15 billionthe 2024 Convertible Notes was approximately $1,066.0$541.8 million, and the carrying value was $1,070.0$460.6 million. As of December 31, 2016,2019, the fair value of the liability component of our $1.15 billionthe 2024 Convertible Notes was approximately $961.3$508.6 million, and the carrying value was $1,024.8$437.4 million. The 2024 Convertible Notes pay interest at a fixed rate of 2.00%2.625% per annum payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2018. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature on March 15, 2024.
As of December 31, 2020, the fair value of the 2025 Notes was approximately $656.3 million and the carrying value was $592.9 million. The 2025 Notes pay interest at a fixed rate of 7.875% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes mature on September 1, 2025, unless redeemed or repurchased in accordance with their terms prior to such date. The 2025 Notes are recorded at their carrying value and their fair value is used only for disclosure purposes, so an increase or decrease in interest rates would not have any impact to our consolidated financial statements; however, if interest rates were to increase or decrease by 1%, their fair value could decrease by approximately $10.2 million or increase by approximately $10.4 million.
As of December 31, 2020, the fair value of the 2026 Notes was approximately $425.0 million and the carrying value was $395.9 million. As of December 31, 2019, the fair value of the 2026 Notes was approximately $424.1 million and the carrying value was $395.3 million. The 2026 Notes pay interest at a fixed rate of 7.250% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on AugustFebruary 15, 2014.2019. The Convertible2026 Notes mature on August 15, 2019,2026, unless earlierredeemed or repurchased or converted. We may not redeem the Convertible Notesin accordance with their terms prior to such date. The 2026 Notes are recorded at their stated maturity date. Since our Credit Facilitycarrying value and their fair value is based on variableused only for disclosure purposes, so an increase or decrease in interest rates and as wewould not have not entered into any interest swap arrangements,impact to our consolidated financial statements; however, if interest rates were to increase or decrease by 1% for the year, and our borrowing amounts stayed constant on our Credit Facility, our annual interest expense, their fair value could increase or decrease by approximately $12.3$2.6 million or increase by approximately $2.6 million.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Stateme
nts and Supplementary Data

Our consolidated financial statements and notes thereto and the report of PricewaterhouseCoopers LLP, independent registered public accounting firm, are set forth in the Index to Financial Statements under Part IV, Item 15,
Exhibits, and Financial Statement Schedules
, of this Annual Report on
Form 10-K,
and are incorporated herein by reference.


The supplementary financial information with respect to selected quarterly financial data is set forth under Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, of this Annual Report on
Form 10-K,
and is incorporated herein by reference.
Item 9.
Changes in and Disagreements
With
Accountants on Accounting and Financial Disclosure
None.
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Item 9.

9A.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Controls and Procedures

None.

Item 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on an evaluation of the Company’s disclosure controls and procedures as of December 31, 20172020 conducted by the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017.

2020.

Management’s Report on Internal Control over Financial Reporting

The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules which require the Company to include in this Annual Report on
Form 10-K,
an assessment by management of the effectiveness of the Company’s internal control over financial reporting as defined in
Rule 13a-15(f)
under the Exchange Act. In addition, the Company’s independent auditors must attest to and report on the effectiveness of the Company’s internal control over financial reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f)
under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s internal control over financial reporting as of December 31, 20172020 based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.

2020.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 20172020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report incorporated by reference in Part II, Item 8,
Financial Statements and Supplementary Data
, of this Annual Report on
Form 10-K.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting as defined in
Rule 13a-15(f)
under the Exchange Act that occurred during the fourth quarter ended December 31, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

OTHER INFORMATION

Other Information

None.


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PART III.

III

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors, Executive Officers and Corporate Governance

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2017.

2020.

Item 11.

EXECUTIVE COMPENSATION

Executive Compensation

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2017.

2020.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2017, except that the information required with respect to our equity compensation plans is set forth under Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Annual Report on Form 10-K, and is incorporated herein by reference.

2020.

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Transactions, and Director Independence

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2017.

2020.

Item 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Principal Accountant Fees and Services

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2017.

2020.

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PART IV

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibits, Financial Statement Schedules

The following documents are filed as part of this Annual Report on
Form 10-K,
or incorporated herein by reference:

1.
Financial Statements.
The following financial statements of Herbalife Nutrition Ltd. are filed as part of this Annual Report on
Form 10-K
on the pages indicated:

Page No.

Page No.
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

79

90

81

93

82

94

83

95

84

96

85

97

86

98

2.
Financial Statement Schedules
. Schedules are omitted because the required information is inapplicable, not material, or the information is presented in the consolidated financial statements or related notes.

3.
Exhibits.
The exhibits listed in the Exhibit Index immediately below are filed as part of this Annual Report on
Form 10-K,
or are incorporated by reference herein.


84

Table of Contents
EXHIBIT INDEX

Exhibit

Number

Description

Reference

Exhibit
Number

Description

Reference

    3.1

Form of Amended and Restated Memorandum and Articles of Association of Herbalife Nutrition Ltd.

(h)

(u

    4.1

Form of Share Certificate

(c)

(c

    4.2

Indenture between Herbalife Ltd. (n/k/a Herbalife Nutrition Ltd.) and MUFG Union Bank, N.A., as trustee, dated February 7, 2014,as of March 23, 2018, governing the 2.00%2.625% Convertible Senior Notes due 20192024

(f)

(l

    4.3

Form of Global Note for 2.00%2.625% Convertible Senior NoteNotes due 20192024 (included as Exhibit A to Exhibit 4.2 hereto)

(f)

(l

    4.4

Indenture among HLF Financing SaRL, LLC, Herbalife International, Inc., the guarantors party thereto and MUFG Union Bank, N.A., as trustee, dated as of August 16, 2018, governing the 7.250% Senior Notes due 2026(n
    4.5Form of Global Note for 7.250% Senior Notes due 2026 (included as Exhibit A to Exhibit 4.4 hereto)(n
    4.6Indenture among Herbalife Nutrition Ltd., HLF Financing, Inc., the guarantors party thereto and MUFG Union Bank, N.A., as trustee, dated as of May 29, 2020, governing the 7.875% Senior Notes due 2025(v
    4.7Form of Global Note for 7.875% Senior Notes due 2025 (included as Exhibit A to Exhibit 4.6 hereto)(v
    4.8Description of Registrant’s Securities(s
  10.1#

Form of Second Amendment and Restatement of the Herbalife International of America, Inc.’s Senior Executive Deferred Compensation Plan effective January 1, 1996, as amended

(a)

(s

  10.2#

Form of Second Amendment and Restatement of the Herbalife International of America, Inc.’s Management Deferred Compensation Plan effective January 1, 1996, as amended

(a)

(s

  10.3#

Herbalife International Inc. 401K Profit Sharing Plan and Trust, as amended

(a)

  10.4

Notice to Distributors, dated as of July 18, 2002, regarding Amendment to Agreements of Distributorship, dated as of July 18, 2002 between Herbalife International, Inc. and each Herbalife Distributor

(a)

(a

  10.5#

  10.4#

Side Letter Agreement dated as of April 3, 2003 by and among WH Holdings (Cayman Islands) Ltd., Michael O. Johnson and the Shareholders listed therein

(a)

(a

  10.6

  10.5

Form of Indemnification Agreement between Herbalife Ltd. and theeach of its directors and certain officers of Herbalife Ltd.its officers

(b)

(b

  10.7#

  10.6#

Amended and Restated Herbalife Ltd. 2005 Stock Incentive Plan

(h)

(d

  10.8#

  10.7#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit Award Agreement

(j)

(i

  10.9#

  10.8#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Appreciation Right Award Agreement

(j)

(i

  10.9#

Herbalife Ltd. Employee Stock Purchase Plan(m
  10.10#

Amended and Restated Herbalife Ltd. Non-Management Directors Compensation Plan

(e
  10.11#Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Appreciation Right Award Agreement applicable to Michael O. Johnson

(j)

  10.11#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Appreciation Right Award Agreement applicable to Richard P. Goudis

(j)

  10.12#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Appreciation Right Award Agreement applicable to Michael O. Johnson

(m)

  10.13#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Appreciation Right Award Agreement applicable to Richard P. Goudis

(m)

  10.14#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit Award Agreement

(m)

  10.15#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Appreciation Right Award Agreement

(m)

  10.16#

Herbalife Ltd. Employee Stock Purchase Plan

(d)

  10.17#

Amendment to Herbalife International Inc. 401K Profit Sharing Plan and Trust

(g)

  10.18#

Form of IndependentNon-Employee Directors Stock Appreciation Right Award Agreement

(h)

(e

85

Table of Contents

Exhibit

Number

Description

Reference

Exhibit
Number

Description

Reference

  10.19#

Herbalife Ltd. Amended and Restated Independent Directors Deferred Compensation and Stock Unit Plan

(h)

  10.12#

  10.20#

Amended and Restated Non-Management Directors Compensation Plan

(i)

  10.21#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Non-Employee Directors Stock Appreciation Right Award Agreement

(i)

  10.22#

Severance Agreement by and between John DeSimone and Herbalife International of America, Inc., dated as of February 23, 2011

(j)

  10.23#

Amended and Restated Severance Agreement, dated as of February 23, 2011, by and between Desmond Walsh and Herbalife International of America, Inc.

(j)

(f

  10.24

  10.13#

Credit Agreement, dated asForm of March 9, 2011, by and among Herbalife International, Inc., Herbalife Ltd., Herbalife International Luxembourg S.a.R.L., certain subsidiaries of HII as guarantors, the lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer

(j)

  10.25

First Amendment, dated July 26, 2012, to Credit Agreement, dated as of March 9, 2011, by and among Herbalife International, Inc., Herbalife Ltd., Herbalife International Luxembourg S.a.R.L., certain subsidiaries of HII as guarantors, the lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer

(m)

  10.26#

Amendment to Amended and Restated Herbalife Ltd. 2005 Stock Incentive Plan

(j)

(f

  10.27

  10.14#

Second Amendment, dated February 3, 2014, to Credit Agreement, dated as of March 9, 2011, by and among Herbalife International, Inc. Herbalife Ltd., Herbalife International Luxembourg S.a.R.L., certain subsidiaries of HII as guarantors, the lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer

(e)

  10.28

Form of Forward Share Repurchase Confirmation

(f)

  10.29

Form of Base Capped Call Confirmation

(f)

  10.30

Form of Additional Capped Call Confirmation

(f)

  10.31#

Form of Herbalife Ltd. 2005 Stock Incentive Plan Performance Condition Stock Appreciation Right Award Agreement

(f)

(o

  10.32#

  10.15#

Amended and Restated Herbalife Ltd. 2014 Stock Incentive Plan

(j)

(f

  10.33

  10.16#

Confirmation between Merrill Lynch International and Herbalife Ltd., dated May 6, 2014

(g)

  10.34

Third Amendment to Credit Agreement dated as of May 4, 2015, among Herbalife Ltd., Herbalife International, Inc., Herbalife International Luxembourg S.a.R.L., the guarantors part thereto, the lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer

(h)

  10.35#

Herbalife Ltd. Executive Incentive Plan

(j)

(f

  10.36

  10.17

Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment

(k)


Exhibit

Number

(g

Description

Reference

  10.37

  10.18

Second Amended and Restated Support Agreement, dated July 15, 2016, by and among Herbalife Ltd., Carl C. Icahn, Icahn Partners Master Fund LP, Icahn Offshore LP, Icahn Partners LP, Icahn Onshore LP, Beckton Corp., Hopper Investments LLC, Barberry Corp., High River Limited Partnership, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings LP, and Icahn Enterprises GP Inc.

(k)

  10.38#

Amended and Restated Employment Agreement by and between Richard P. Goudis and Herbalife International of America, Inc., dated as of November 1, 2016

(l)

(h

  10.39#

  10.19#

Letter Agreement by and between Michael O. Johnson and Herbalife International of America, Inc., dated November 1, 2016

(l)

  10.40#

Herbalife International of America, Inc. Executive Officer Severance Plan

(l)

(h

  10.41

  10.20#

Stock Unit Award Agreement (Performance-Vesting) by and between Herbalife Ltd. and Richard P. Goudis dated as of June 6, 2017

(i
  10.21Agreement, dated August 21, 2017, by and among Herbalife Ltd. and Carl C. Icahn and his controlled affiliates party thereto(j
  10.22#Form of Herbalife Ltd. 2014 Stock Incentive Plan Stock Unit Award Agreement(k
  10.23#Form of Herbalife Ltd. 2014 Stock Incentive Plan Stock Appreciation Right Award Agreement(k
  10.24#Form of Herbalife Ltd. 2014 Stock Incentive Plan Lead Director Stock Unit Award Agreement(k
  10.25#Form of Herbalife Ltd. 2014 Stock Incentive Plan Independent Directors Stock Unit Award Agreement(k
  10.26#Form of Herbalife Ltd. 2014 Stock Incentive Plan Performance Based Stock Appreciation Right Award Agreement(k
  10.27#Form of Herbalife Ltd. 2014 Stock Incentive Plan Restricted Cash Unit Award Agreement(k
  10.28Credit Agreement, dated as of February 15, 2017, by andAugust 16, 2018, among HLF Financing S.à r.l., HLF Financing US,SaRL, LLC, Herbalife Nutrition Ltd., Herbalife International Luxembourg S.à R.L., Herbalife International, Inc., the several banks and other financial institutions or entities from time to time party thereto Credit Suisse AG, Cayman Islands Branch, as lenders, Jefferies Finance LLC, as administrative agent for the Term Administrative AgentB Lenders and Collateral Agent,collateral agent, and Coöperatieve Rabobank U.A., New York Branch, as an Issuing Bank and as administrative agent for the Revolver Administrative AgentTerm A Lenders and the Revolving Credit Lenders

(l)

(n

  10.42#

  10.29#

Stock Unit AwardLetter Agreement, (Performance-Vesting)dated July 11, 2019, by and between Herbalife Ltd. and Richard P. Goudis dated as of June 6, 2017

(m)

  10.43

Agreement by and among Herbalife Ltd. and Carl C. Icahn and his controlled affiliates, dated August 21, 2017.

(n)

  10.44

Contingent Value Rights Agreement by and between Herbalife Ltd. and Computershare Trust Company, N.A., as Administrative Agent, dated as of October 11, 2017

(o)

  10.45#

Employment Agreement dated as of March 27, 2008 between Michael O. Johnson and Herbalife International of America, Inc.

(d)

(p

  10.46#

  10.30#

FormSeparation Agreement and General Release dated as of January 8, 2019, by and between Richard P. Goudis and Herbalife Ltd. 2014 Stock Incentive Plan Stock Unit Award AgreementInternational of America, Inc.

*

(o

  10.47#

  10.31#

FormEmployment Agreement, dated as of October 23, 2019, by and among Dr. John Agwunobi, Herbalife International of America, Inc., and Herbalife Nutrition Ltd. 2014 Stock Incentive Plan Stock Appreciation Right Award Agreement

*

(q
86

Table of Contents

Exhibit
Number

Description

Reference

  10.48#

Form of Herbalife Ltd. 2014 Stock Incentive Plan Lead Director Stock Unit Award Agreement

*

  10.32#

Employment Agreement, dated as of October 23, 2019, by and among John G. DeSimone, Herbalife International of America, Inc., and Herbalife Nutrition Ltd.

(q

  10.49#

Form of Herbalife Ltd. 2014 Stock Incentive Plan Independent Directors Stock Unit Award Agreement

*

  10.33

First Amendment to Credit Agreement, dated as of December 12, 2019, by and among HLF Financing SaRL, LLC, Herbalife Nutrition Ltd., Herbalife International Luxembourg S.à R.L., Herbalife International, Inc., the Company’s subsidiaries party thereto as subsidiary guarantors, the several banks and other financial institutions or entities party thereto as lenders and Jefferies Finance LLC, as administrative agent for the Term Loan B Lenders and collateral agent

(r

  10.50#

Form of Herbalife Ltd. 2014 Stock Incentive Plan Performance Based Stock Appreciation Right Award Agreement

*

  10.34

Second Amendment to Credit Agreement, dated as of March 19, 2020, by and among HLF Financing SaRL, LLC, Herbalife Nutrition Ltd., Herbalife International Luxembourg S.à R.L., Herbalife International, Inc., the Company’s subsidiaries party thereto as subsidiary guarantors, the several banks and other financial institutions or entities party thereto as lenders and Coöperatieve Rabobank U.A., New York Branch as administrative agent for the Term Loan A Lenders and Revolving Credit Lenders

(t

  10.51#

Form of Herbalife Ltd. 2014 Stock Incentive Plan Restricted Cash Unit Award Agreement

*

  10.35

Deferred Prosecution Agreement between Herbalife Nutrition Ltd. and the United States Department of Justice

(w

  10.36Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order(w
  10.37Letter Agreement, dated November 4, 2020, with respect to Second Amended and Restated Support Agreement, dated July 15, 2016, by and among Herbalife Nutrition Ltd., Carl C. Icahn, Icahn Partners LP, Icahn Partners Master Fund LP, Icahn Onshore LP, Icahn Offshore LP, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P., Icahn Enterprises G.P. Inc. and Beckton Corp.(x
  10.38Purchase Agreement, dated January 3, 2021, by and among Herbalife Nutrition Ltd., Carl C. Icahn, Icahn Partners LP, Icahn Partners Master Fund LP, Icahn Onshore LP, Icahn Offshore LP, Icahn Capital LP, IPH GP LLC, Beckton Corp., Icahn Enterprises Holdings L.P. and Icahn Enterprises G.P. Inc.(y
  10.39Third Amendment to Credit Agreement, dated as of February 10, 2021, by and among HLF Financing SaRL, LLC, Herbalife Nutrition Ltd., Herbalife International Luxembourg S.à R.L., Herbalife International, Inc., Herbalife Nutrition’s subsidiaries party thereto as subsidiary guarantors, the several banks and other financial institutions or entities party thereto as lenders and Jefferies Finance LLC, as administrative agent for the Term Loan B Lenders and collateral agent(z
  21.1

Subsidiaries of the Registrant

*

  23.1

Consent of PricewaterhouseCoopers LLP — Independent Registered Public Accounting Firm

*

  31.1

Rule 13a-14(a) Certification of Chief Executive Officer

*

  31.2

Rule 13a-14(a) Certification of Chief Financial Officer

*

  32.1

Section 1350 Certification of Chief Executive Officer

*

  32.2

Section 1350 Certification of Chief Financial Officer

*


Exhibit

Number

*

Description

Reference

101.INS

Inline XBRL Instance Document

– The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*

87

Table of Contents

Exhibit
Number

Description

Reference

101.SCH

101.SCHInline XBRL Taxonomy Extension Schema Document

*

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

*

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

*

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

*

104Cover Page Interactive Data File – The cover page from the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2020 is formatted in Inline XBRL (included as Exhibit 101)
*

*

Filed herewith.

#

**

Furnished herewith.
#
Management contract or compensatory plan or arrangement.

(a)

Previously filed on October 1, 2004 as an Exhibit to the Company’s registration statement on Form
S-1 (File
(File
No. 333-119485)
and is incorporated herein by reference.

(b)

Previously filed on December 2, 2004 as an Exhibit to Amendment No. 4 to the Company’s registration statement on Form
S-1 (File
(File
No. 333-119485)
and is incorporated herein by reference.

(c)

Previously filed on December 14, 2004 as an Exhibit to Amendment No. 5 to the Company’s registration statement on Form
S-1 (File
(File
No. 333-119485)
and is incorporated herein by reference.

(d)

Previously filed on April 29, 2013 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and is incorporated herein by reference.

(e)

Previously filed on February 7, 2014 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.

(f)

Previously filed on February 18, 2014 as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and is incorporated by reference.

(g)

Previously filed on July 28, 2014 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and is incorporated herein by reference.

(h)

Previously filed on May 5, 2015 as an Exhibit to the Company’s Quarterly Report on Form

10-Q
for the quarter ended March 31, 2015 and is incorporated herein by reference.

(i)

(e)

Previously filed on August 5, 2015 as an Exhibit to the Company’s Quarterly Report on Form
10-Q
for the quarter ended June 30, 2015 and is incorporated herein by reference.

(j)

(f)

Previously filed on May 5, 2016 as an Exhibit to the Company’s Quarterly Report on Form
10-Q
for the quarter ended March 31, 2016 and is incorporated herein by reference.

(k)

(g)

Previously filed on July 15, 2016 as an Exhibit to the Company’s Current Report on Form
8-K
and is incorporated herein by reference.

(l)

(h)

Previously filed on February 23, 2017 as an Exhibit to the Company’s Annual Report on Form
10-K
for the year ended December 31, 2016 and is incorporated herein by reference.

(m)

(i)

Previously filed on August 1, 2017 as an Exhibit to the Company’s Quarterly Report on Form
10-Q
for the quarter ended June 30, 2017 and is incorporated herein by reference.

(n)

(j)

Previously filed on August 21, 2017 as an Exhibit to the Company’s Tender Offer Statement on Schedule TO and is incorporated herein by reference.

(o)

(k)

Previously filed on October 11, 2017February 22, 2018 as an Exhibit to the Company’s Amendment No. 6 to its Tender Offer StatementAnnual Report on Schedule TOForm
10-K
for the year ended December 31, 2017 and is incorporated herein by reference.

(l)
Previously filed on March 29, 2018 as an Exhibit to the Company’s Current Report on Form
8-K
and is incorporated herein by reference.
(m)
Previously filed on May 3, 2018 as an Exhibit to the Company’s Quarterly Report on Form
10-Q
for the quarter ended March 31, 2018 and is incorporated herein by reference.
(n)
Previously filed on August 22, 2018 as an Exhibit to the Company’s Current Report on Form
8-K
and is incorporated herein by reference.
(o)
Previously filed on February 19, 2019 as an Exhibit to the Company’s Annual Report on Form
10-K
for the year ended December 31, 2018 and is incorporated herein by reference.
(p)
Previously filed on August 1, 2019 as an Exhibit to the Company’s Quarterly Report on Form
10-Q
for the quarter ended June 30, 2019 and is incorporated herein by reference.
(q)
Previously filed on October 29, 2019 as an Exhibit to the Company’s Quarterly Report on Form
10-Q
for the quarter ended September 30, 2019 and is incorporated herein by reference.
(r)
Previously filed on December 12, 2019 as an Exhibit to the Company’s Current Report on Form
8-K
and is incorporated herein by reference.

88

(s)
Previously filed on February 18, 2020 as an Exhibit to the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019.
(t)
Previously filed on March 19, 2020 as an Exhibit to the Company’s Current Report on Form
8-K
and is incorporated herein by reference.
(u)
Previously filed on May 7, 2020 as an Exhibit to the Company’s Quarterly Report on Form
10-Q
for the quarter ended March 31, 2020 and is incorporated herein by reference.
(v)
Previously filed on May 29, 2020 as an Exhibit to the Company’s Current Report on Form
8-K
and is incorporated herein by reference.
(w)
Previously filed on November 5, 2020 as an Exhibit to the Company’s Quarterly Report on Form
10-Q
for the quarter ended September 30, 2020 and is incorporated herein by reference.
(x)
Previously filed on November 5, 2020 as an Exhibit to the Company’s Current Report on Form
8-K
and is incorporated herein by reference.
(y)
Previously filed on January 4, 2021 as an Exhibit to the Company’s Current Report on Form
8-K
and is incorporated herein by reference.
(z)
Previously filed on February 11, 2021 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
89

REPORT OF INDEPENDENT REGISTEREDINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Herbalife Nutrition Ltd.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Herbalife Nutrition Ltd. and its subsidiaries (the “Company”) as of December 31, 20172020 and December 31, 2016,2019, and the related consolidated statements of income, of comprehensive income, of changes in shareholders’ (deficit) equitydeficit, and of cash flows for each of the three years in the period ended December 31, 2017,2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company'sCompany’s internal control over financial reporting as of December 31, 2017,2020 based on criteria established in
Internal Control - Integrated Framework (2013)
 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and December 31, 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020 based on criteria established in
Internal Control - Integrated Framework (2013)
 issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for unrealized excess tax benefits in 2017.

Basis for Opinions

The Company'sCompany’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
90

includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Loss Contingencies
As described in Note 7 to the consolidated financial statements, the Company is from time to time engaged in routine litigation. As disclosed by management, an estimated loss from a loss contingency is recorded when information available prior to issuance of the Company’s financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Management also discloses material contingencies when they believe a loss is not probable but reasonably possible. Management regularly reviews all pending litigation matters in which it is involved and establishes reserves for these litigation matters when a probable loss estimate can be made. Accounting for contingencies such as legal and
non-income
tax matters requires management to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss.
The principal considerations for our determination that performing procedures relating to loss contingencies is a critical audit matter are the significant judgment by management when assessing the likelihood of a loss being incurred and when determining whether a reasonable estimate of the loss or range of loss for each matter can be made, which in turn led to a high degree of auditor judgment and effort in evaluating management’s assessment of loss contingencies associated with legal and
non-income
tax matters. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s evaluation of loss contingencies associated with legal and
non-income
tax matters, including controls over determining whether a loss is probable and whether the amount of loss can be reasonably estimated, as well as financial statement disclosures. These procedures also included, among others, obtaining and evaluating the letters of audit inquiry from the Company’s external legal counsel, evaluating the reasonableness of management’s assessment regarding whether an unfavorable outcome is reasonably possible or probable and reasonably estimable, and evaluating the sufficiency of the Company’s contingency disclosures.
91

Professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of certain contingencies, evaluation of whether the positions taken by management are reasonable and assessing the audit evidence obtained.
/s/ PricewaterhouseCoopers LLP

Los Angeles, California

February 22, 2018

17, 2021

We have served as the Company’s auditor since 2013.


92

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,278.8

 

 

$

844.0

 

Receivables, net of allowance for doubtful accounts

 

 

93.3

 

 

 

70.3

 

Inventories

 

 

341.2

 

 

 

371.3

 

Prepaid expenses and other current assets

 

 

147.0

 

 

 

176.9

 

Total current assets

 

 

1,860.3

 

 

 

1,462.5

 

Property, plant and equipment, at cost, net of accumulated depreciation and

    amortization

 

 

377.5

 

 

 

378.0

 

Marketing related intangibles and other intangible assets, net

 

 

310.1

 

 

 

310.1

 

Goodwill

 

 

96.9

 

 

 

89.9

 

Other assets

 

 

250.3

 

 

 

324.9

 

Total assets

 

$

2,895.1

 

 

$

2,565.4

 

LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

67.8

 

 

$

66.0

 

Royalty overrides

 

 

277.7

 

 

 

261.2

 

Current portion of long-term debt

 

 

102.4

 

 

 

9.5

 

Other current liabilities

 

 

458.9

 

 

 

454.8

 

Total current liabilities

 

 

906.8

 

 

 

791.5

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

2,165.7

 

 

 

1,438.4

 

Other non-current liabilities

 

 

157.3

 

 

 

139.2

 

Total liabilities

 

 

3,229.8

 

 

 

2,369.1

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

SHAREHOLDERS’ (DEFICIT) EQUITY:

 

 

 

 

 

 

 

 

Common shares, $0.001 par value; 1.0 billion shares authorized; 82.3 million (2017)

    and 93.1 million (2016) shares outstanding

 

 

0.1

 

 

 

0.1

 

Paid-in capital in excess of par value

 

 

407.3

 

 

 

467.6

 

Accumulated other comprehensive loss

 

 

(165.4

)

 

 

(205.1

)

Accumulated deficit

 

 

(248.1

)

 

 

(66.3

)

Treasury stock, at cost, 5.0 million shares (2017)

 

 

(328.6

)

 

 

Total shareholders’ (deficit) equity

 

 

(334.7

)

 

 

196.3

 

Total liabilities and shareholders’ (deficit) equity

 

$

2,895.1

 

 

$

2,565.4

 

   
December 31,
   
        2020        
 
        2019        
   
(in millions, except share and par value amounts)
ASSETS
     
Current assets:
     
Cash and cash equivalents
   $1,045.4   $839.4 
Receivables, net of allowance for doubtful accounts
    83.3    79.7 
Inventories
    501.4    436.2 
Prepaid expenses and other current assets
    145.7    132.9 
            
Total current assets
    1,775.8    1,488.2 
            
Property, plant, and equipment, at cost, net of accumulated depreciation and amortization
    390.2    371.5 
Operating lease
right-of-use
assets
    222.8    189.5 
Marketing-related intangibles and other intangible assets, net
    313.3    310.1 
Goodwill
    100.5    91.5 
Other assets
    273.5    227.8 
            
Total assets
   $3,076.1   $2,678.6 
            
LIABILITIES AND SHAREHOLDERS’ DEFICIT
     
Current liabilities:
     
Accounts payable
   $88.7   $81.6 
Royalty overrides
    358.2    294.1 
Current portion of long-term debt
    22.9    24.1 
Other current liabilities
    657.5    564.6 
            
Total current liabilities
    1,127.3    964.4 
            
Long-term debt, net of current portion
    2,405.5    1,778.9 
Non-current
operating lease liabilities
    206.7    169.9 
Other
non-current
liabilities
    192.7    155.4 
            
Total liabilities
    3,932.2    3,068.6 
            
Commitments and contingencies
  0 0
Shareholders’ deficit:
     
Common shares, $0.0005 par value; 2.0
 
b
illion shares authorized; 120.1 million (2020) and 137.4 million (2019) shares outstanding
    0.1    0.1 
Paid-in
capital in excess of par value
    342.3    366.6 
Accumulated other comprehensive loss
    (182.2   (212.5
Accumulated deficit
    (687.4   (215.3
Treasury stock, at cost, 10.0 million (2020) and 10.0 million (2019) shares
    (328.9   (328.9
            
Total shareholders’ deficit
    (856.1   (390.0
            
Total liabilities and shareholders’ deficit
   $
 
 
3,076.1   $
 
 
2,678.6 
            
See the accompanying notes to consolidated financial statements.


93

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(In millions, except per share amounts)

 

Net sales

 

$

4,427.7

 

 

$

4,488.4

 

 

$

4,469.0

 

Cost of sales

 

 

848.6

 

 

 

854.6

 

 

 

856.0

 

Gross profit

 

 

3,579.1

 

 

 

3,633.8

 

 

 

3,613.0

 

Royalty overrides

 

 

1,254.2

 

 

 

1,272.6

 

 

 

1,251.4

 

Selling, general and administrative expenses

 

 

1,758.6

 

 

 

1,966.9

 

 

 

1,784.5

 

Other operating income

 

 

(50.8

)

 

 

(63.8

)

 

 

(6.5

)

Operating income

 

 

617.1

 

 

 

458.1

 

 

 

583.6

 

Interest expense

 

 

160.8

 

 

 

99.3

 

 

 

100.5

 

Interest income

 

 

14.5

 

 

 

5.9

 

 

 

5.6

 

Other (income) expense, net

 

 

(0.4

)

 

 

 

 

 

2.3

 

Income before income taxes

 

 

471.2

 

 

 

364.7

 

 

 

486.4

 

Income taxes

 

 

257.3

 

 

 

104.7

 

 

 

147.3

 

NET INCOME

 

$

213.9

 

 

$

260.0

 

 

$

339.1

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.70

 

 

$

3.13

 

 

$

4.11

 

Diluted

 

$

2.58

 

 

$

3.02

 

 

$

3.97

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

79.2

 

 

 

83.0

 

 

 

82.6

 

Diluted

 

 

82.9

 

 

 

86.1

 

 

 

85.3

 

   
Year Ended December 31,
 
   
2020
  
2019
  
2018
 
   
(in millions, except per share amounts)
 
Net sales
  $5,541.8  $4,877.1  $4,891.8 
Cost of sales
   1,150.6   958.0   919.3 
             
Gross profit
   4,391.2   3,919.1   3,972.5 
Royalty overrides
   1,690.1   1,448.2   1,364.0 
Selling, general, and administrative expenses
   2,075.0   1,940.3   1,955.2 
Other operating income
   (14.5  (37.5  (29.8
             
Operating income
   640.6   568.1   683.1 
Interest expense
   133.0   153.0   181.0 
Interest income
   8.8   20.6   19.4 
Other expense (income), net
   —     (15.7  57.3 
             
Income before income taxes
   516.4   451.4   464.2 
Income taxes
   143.8��  140.4   167.6 
             
Net income
  $372.6  $311.0  $296.6 
             
Earnings per share:
    
Basic
  $2.83  $2.26  $2.12 
Diluted
  $2.77  $2.20  $1.98 
Weighted-average shares outstanding:
    
Basic
   131.5   137.4   140.2 
Diluted
   134.5   141.6   149.5 
See the accompanying notes to consolidated financial statements.


94

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Year Ended

December 31,

2017

 

 

Year Ended

December 31,

2016

 

 

Year Ended

December 31,

2015

 

 

 

(In millions)

 

Net income

 

$

213.9

 

 

$

260.0

 

 

$

339.1

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of income taxes of

    $5.7 (2017), $5.2 (2016), and $(7.2) (2015)

 

 

44.9

 

 

 

(32.5

)

 

 

(86.6

)

Unrealized loss on derivatives, net of income taxes of

    $— (2017), $(0.3) (2016), and $(0.6) (2015)

 

 

(5.2

)

 

 

(7.0

)

 

 

(0.6

)

Other, net of income taxes of $— (2017), $0.1 (2016), and $(0.1) (2015)

 

 

 

 

 

(0.1

)

 

 

(0.1

)

Total other comprehensive income (loss)

 

 

39.7

 

 

 

(39.6

)

 

 

(87.3

)

Total comprehensive income

 

$

253.6

 

 

$

220.4

 

 

$

251.8

 

   
Year Ended December 31,
 
   
2020
  
2019
  
2018
 
   
(in millions)
 
Net income
  $372.6  $311.0  $296.6 
Other comprehensive income (loss):
    
Foreign currency translation adjustment, net of income taxes of $(2.0) (2020), $0.1 (2019), and $(2.7) (2018)
   33.2   —     (41.0
Unrealized loss on derivatives, net of income taxes of $(0.4) (2020), $0
 
(2019), and $0 
 
(2018)
   (2.9  (2.7  (3.4
             
Total other comprehensive income (loss)
   30.3   (2.7  (44.4
             
Total comprehensive income
  $402.9  $308.3  $252.2 
             
See the accompanying notes to consolidated financial statements.


95

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY

DEFICIT

 

 

Common

Shares

 

 

Treasury Stock

 

 

Paid-in

Capital in

Excess of

par Value

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Total

Shareholders’

(Deficit)

Equity

 

 

 

(In millions, except per share amounts)

 

Balance as of December 31, 2014

 

$

0.1

 

 

$

 

 

$

409.1

 

 

$

(78.2

)

 

$

(665.4

)

 

$

(334.4

)

Issuance of 1.0 million common shares from exercise of

    stock options, SARs, restricted stock units, employee

    stock purchase plan, and other

 

 

 

 

 

 

 

 

 

2.8

 

 

 

 

 

 

 

 

 

 

 

2.8

 

Excess tax deficit from exercise of stock options, SARs

    and restricted stock grants

 

 

 

 

 

 

 

 

 

 

(2.0

)

 

 

 

 

 

 

 

 

 

 

(2.0

)

Additional capital from share-based compensation

 

 

 

 

 

 

 

 

 

 

44.9

 

 

 

 

 

 

 

 

 

 

 

44.9

 

Repurchases of 0.4 million common shares

 

 

 

 

 

 

 

 

 

(16.6

)

 

 

 

 

 

 

 

 

 

 

(16.6

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

339.1

 

 

 

339.1

 

Foreign currency translation adjustment, net of income

    taxes of $(7.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(86.6

)

 

 

 

 

 

 

(86.6

)

Unrealized loss on derivatives, net of income taxes of $(0.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.6

)

 

 

 

 

 

 

(0.6

)

Other, net of income taxes of $(0.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.1

)

 

 

 

 

 

 

(0.1

)

Balance as of December 31, 2015

 

$

0.1

 

 

$

 

 

$

438.2

 

 

$

(165.5

)

 

$

(326.3

)

 

$

(53.5

)

Issuance of 0.6 million common shares from exercise of

    stock options, SARs, restricted stock units, employee

    stock purchase plan, and other

 

 

 

 

 

 

 

 

 

2.0

 

 

 

 

 

 

 

 

 

 

 

2.0

 

Excess tax benefit from exercise of stock options, SARs

    and restricted stock grants

 

 

 

 

 

 

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

0.4

 

Additional capital from share-based compensation

 

 

 

 

 

 

 

 

 

 

40.2

 

 

 

 

 

 

 

 

 

 

 

40.2

 

Repurchases of 0.2 million common shares

 

 

 

 

 

 

 

 

 

(13.2

)

 

 

 

 

 

 

 

 

 

 

(13.2

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

260.0

 

 

 

260.0

 

Foreign currency translation adjustment, net of income

    taxes of $5.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32.5

)

 

 

 

 

 

 

(32.5

)

Unrealized loss on derivatives, net of income taxes of $(0.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7.0

)

 

 

 

 

 

 

(7.0

)

Other, net of income taxes of $0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.1

)

 

 

 

 

 

 

(0.1

)

Balance as of December 31, 2016

 

$

0.1

 

 

$

 

 

$

467.6

 

 

$

(205.1

)

 

$

(66.3

)

 

$

196.3

 

Issuance of 1.9 million common shares from exercise of

    stock options, SARs, restricted stock units, employee

    stock purchase plan, and other

 

 

 

 

 

 

 

 

 

2.1

 

 

 

 

 

 

 

 

 

 

 

2.1

 

Additional capital from share-based compensation

 

 

 

 

 

 

 

 

 

 

42.1

 

 

 

 

 

 

 

 

 

 

 

42.1

 

Repurchases of 12.7 million common shares

 

 

 

 

 

(328.6

)

 

 

(101.7

)

 

 

 

 

 

 

(425.4

)

 

 

(855.7

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

213.9

 

 

 

213.9

 

Foreign currency translation adjustment, net of income

    taxes of $5.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44.9

 

 

 

 

 

 

 

44.9

 

Unrealized loss on derivatives, net of income taxes of $—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5.2

)

 

 

 

 

 

 

(5.2

)

Cumulative effect of accounting change and other, net

    of income taxes of $—

 

 

 

 

 

 

 

 

 

 

(2.8

)

 

 

 

 

 

29.7

 

 

 

26.9

 

Balance as of December 31, 2017

 

$

0.1

 

 

$

(328.6

)

 

$

407.3

 

 

$

(165.4

)

 

$

(248.1

)

 

$

(334.7

)

   
Common
Shares
  
Treasury
Stock
 
Paid-in

Capital in
Excess of
Par Value
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Shareholders’
Deficit
             
(in millions)
         
Balance as of December 31, 2017
   $0.1    $(328.6  $407.3   $(165.4  $(248.1  $(334.7
Issuance of 6.3 common shares from exercise of stock options, SARs, restricted stock units, employee stock purchase plan, and other
    —            2.5              2.5 
Additional capital from share-based compensation
               35.5              35.5 
Repurchases of 14.3 common shares
    —       (0.3   (173.4        (572.4   (746.1
Forward Counterparties’ delivery of 13.9 common shares to the Company
               —                —   
Issuance of convertible senior notes
               136.7              136.7 
Repayment of convertible senior notes
               (123.0             (123.0
Unwind of capped call transactions
               55.9              55.9 
Net income
                         296.6    296.6 
Foreign currency translation adjustment, net of income taxes of $(2.7)
                    (41.0        (41.0
Unrealized loss on derivatives, net of income taxes of $0
                    (3.4        (3.4
Cumulative effect of accounting change
                         (2.4   (2.4
                                 
Balance as of December 31, 2018
    0.1     (328.9   341.5    (209.8   (526.3   (723.4
Issuance of 1.0 common shares from exercise of stock options, SARs, restricted stock units, employee stock purchase plan, and other
    —            3.2              3.2 
Additional capital from share-based compensation
               38.6              38.6 
Repurchases of 0.4 common shares
    —            (16.7             (16.7
Forward Counterparties’ delivery of 6.0 common shares to the Company
    —            —                —   
Net income
                         311.0    311.0 
Foreign currency translation adjustment, net of income taxes of $0.1
                    —           —   
Unrealized loss on derivatives, net of income taxes of $0
                    (2.7        (2.7
                                 
Balance as of December 31, 2019
    0.1     (328.9   366.6    (212.5   (215.3   (390.0
Issuance of 1.7 common shares from exercise of stock options, SARs, restricted stock units, employee stock purchase plan, and other
    —            3.5              3.5 
Additional capital from share-based compensation
               51.0              51.0 
Repurchases of 19.0 common shares
    —            (78.8        (844.7   (923.5
Net income
                         372.6    372.6 
Foreign currency translation adjustment, net of income taxes of $(2.0)
                    33.2         33.2 
Unrealized loss on derivatives, net of income taxes of $(0.4)
                    (2.9        (2.9
                                 
Balance as of December 31, 2020
   $0.1    $(328.9  $342.3   $(182.2  $(687.4  $(856.1
                                 
See the accompanying notes to consolidated financial statements.


96

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(In millions)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

213.9

 

 

$

260.0

 

 

$

339.1

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

99.8

 

 

 

98.3

 

 

 

98.0

 

Share-based compensation expenses

 

 

42.1

 

 

 

40.2

 

 

 

44.9

 

Non-cash interest expense

 

 

60.2

 

 

 

55.7

 

 

 

56.2

 

Deferred income taxes

 

 

97.8

 

 

 

(36.4

)

 

 

(38.2

)

Inventory write-downs

 

 

20.7

 

 

 

15.8

 

 

 

25.3

 

Foreign exchange transaction loss

 

 

2.4

 

 

 

3.7

 

 

 

26.6

 

Other

 

 

1.9

 

 

 

(11.7

)

 

 

10.8

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

(22.2

)

 

 

 

 

 

(6.2

)

Inventories

 

 

37.9

 

 

 

(71.6

)

 

 

(30.5

)

Prepaid expenses and other current assets

 

 

38.3

 

 

 

0.8

 

 

 

19.8

 

Accounts payable

 

 

(5.0

)

 

 

(1.3

)

 

 

6.0

 

Royalty overrides

 

 

6.0

 

 

 

20.9

 

 

 

21.6

 

Other current liabilities

 

 

(17.1

)

 

 

12.4

 

 

 

73.5

 

Other

 

 

14.1

 

 

 

(19.5

)

 

 

(18.2

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

590.8

 

 

 

367.3

 

 

 

628.7

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(95.5

)

 

 

(143.4

)

 

 

(79.0

)

Investments in Venezuelan bonds

 

 

 

 

 

 

 

(0.1

)

Other

 

 

(2.3

)

 

 

2.1

 

 

 

5.7

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(97.8

)

 

 

(141.3

)

 

 

(73.4

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings from senior secured credit facility, net of discount

 

 

1,274.0

 

 

 

200.0

 

 

 

 

Principal payments on senior secured credit facility and other debt

 

 

(494.5

)

 

 

(438.8

)

 

 

(227.6

)

Debt issuance costs

 

 

(22.6

)

 

 

 

 

 

(6.2

)

Share repurchases

 

 

(844.2

)

 

 

(13.2

)

 

 

(16.6

)

Other

 

 

2.1

 

 

 

(0.3

)

 

 

0.4

 

NET CASH USED IN FINANCING ACTIVITIES

 

 

(85.2

)

 

 

(252.3

)

 

 

(250.0

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

27.0

 

 

 

(19.5

)

 

 

(60.9

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

434.8

 

 

 

(45.8

)

 

 

244.4

 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

 

844.0

 

 

 

889.8

 

 

 

645.4

 

CASH AND CASH EQUIVALENTS, END OF YEAR

 

$

1,278.8

 

 

$

844.0

 

 

$

889.8

 

CASH PAID DURING THE YEAR

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

100.7

 

 

$

45.4

 

 

$

50.5

 

Income taxes paid

 

$

158.8

 

 

$

162.9

 

 

$

168.4

 

  
Year Ended December 31,
 
  
2020
  
2019
  
2018
 
  
(in millions)
 
Cash flows from operating activities:
   
Net income
 $372.6  $311.0  $296.6 
Adjustments to reconcile net income to net cash provided by operating activities:
   
Depreciation and amortization
  100.3   97.7   100.4 
Share-based compensation expenses
  51.0   38.6   35.5 
Non-cash
interest expense
  26.7   43.7   63.8 
Deferred income taxes
  2.0   15.4   (8.1
Inventory write-downs
  20.6   19.1   17.4 
Foreign exchange transaction loss
  9.9   2.1   8.0 
Loss on extinguishment of debt
  —     —     48.5 
Other
  5.3   (7.9  7.1 
Changes in operating assets and liabilities:
   
Receivables
  (5.8  (14.4  2.8 
Inventories
  (76.6  (68.6  (83.3
Prepaid expenses and other current assets
  (11.9  28.3   (5.1
Accounts payable
  5.5   0.1   21.7 
Royalty overrides
  61.2   11.5   22.8 
Other current liabilities
  77.6   (5.5  106.8 
Other
  (9.8  (13.6  13.5 
            
Net cash provided by operating activities
  628.6   457.5   648.4 
            
Cash flows from investing activities:
   
Purchases of property, plant, and equipment
  (112.0  (106.1  (84.0
Other
  (11.2  (1.9  0.1 
            
Net cash used in investing activities
  (123.2  (108.0  (83.9
            
Cash flows from financing activities:
   
Borrowings from senior secured credit facility and other debt, net of discount
  31.5   —     998.1 
Principal payments on senior secured credit facility and other debt
  (24.5  (24.5  (1,237.4
Proceeds from convertible senior notes
  —     —     550.0 
Repayment of convertible senior notes
  —     (675.0  (582.5
Proceeds from senior notes
  600.0   —     400.0 
Debt issuance costs
  (7.9  —     (29.9
Share repurchases
  (923.5  (16.7  (750.3
Proceeds from settlement of capped call transactions
  —     —     55.9 
Other
  3.5   3.2   3.0 
            
Net cash used in financing activities
  (320.9  (713.0  (593.1
            
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
  22.0   (4.0  (51.9
            
Net change in cash, cash equivalents, and restricted cash
  206.5   (367.5  (80.5
Cash, cash equivalents, and restricted cash, beginning of period
  847.5   1,215.0   1,295.5 
            
Cash, cash equivalents, and restricted cash, end of period
 $1,054.0  $847.5  $1,215.0 
            
Cash paid during the year:
   
Interest paid
 $78.9  $114.3  $106.1 
            
Income taxes paid
 $138.2  $147.9  $158.9 
            
See the accompanying notes to consolidated financial statements.


97

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Herbalife Nutrition Ltd., a Cayman Islands exempted company with limited liability, was incorporated on April 4, 2002. Herbalife Nutrition Ltd. (and together with its subsidiaries, the “Company” or “Herbalife”) is a global nutrition company that sells weight management,management; targeted nutrition,nutrition; energy, sports, & fitness,and fitness; and outer nutrition products to and through a network of independent members, or Members. In China, the Company sells its products to and through independent service providers 
and
sales representatives and sales officers to customers and preferred customers, as well as through Company-operated retail storesplatforms when necessary. The Company reports revenuesells its products in six6 geographic regions: North America; Mexico; South and Central America; EMEA, which consists of Europe, the Middle East, and Africa; Asia Pacific (excluding China); and China.

2. Basis of Presentation

The Company’s consolidated financial statements refer to Herbalife Nutrition Ltd. and its subsidiaries.

Recently Adopted Pronouncements

In MarchJune 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU,
No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU is intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the income tax effects of share-based payments and accounting for forfeitures. The amendments in this update became effective for the Company’s reporting period beginning January 1, 2017. This guidance requires the Company to recognize excess tax benefits on share-based compensation arrangements in its tax provision, instead of in shareholders’ (deficit) equity as under the previous guidance. During the year ended December 31, 2017, the Company recorded $31.1 million of excess tax benefits in its tax provision. In addition, these amounts are now required to be classified as an operating activity in the Company’s statement of cash flows rather than a financing activity. The Company has elected to present the cash flow statement using a prospective transition method and prior periods have not been adjusted. In addition, the Company has made an accounting policy election to continue to estimate the number of forfeitures expected to occur. The adoption of this guidance also increased the Company’s number of shares used in its calculation of fully diluted earnings per share due to the reduction in assumed proceeds under the treasury stock method which also impacts how the Company determines its earnings per share calculation. Upon adoption of this guidance on January 1, 2017, the Company also recognized $29.6 million of its unrealized excess tax benefits as deferred tax assets on its consolidated balance sheet with a corresponding increase to its retained earnings.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This ASU clarified the requirements for assessing whether contingent put or call options that can accelerate the payment of principal on debt instruments are clearly and closely related (i.e. an entity is required to assess whether the economic characteristics and risks of embedded put or call options are clearly and closely related to those of their debt hosts only in accordance with the four-step decision sequence of FASB Accounting Standards Codification, or ASC 815, Derivatives and Hedging). An entity should no longer assess whether the event that triggers the ability to exercise a put or call option is related to interest rates or credit risk of the entity. In the first quarter of 2017, the Company adopted and applied the standard to its applicable financial instruments. The adoption of this guidance had no financial impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This ASU provides guidance clarifying that the novation of a derivative contract (i.e. a change in counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. If all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterpart to the derivative contract is considered, the hedging relationship will continue uninterrupted. The adoption of this guidance during the first quarter of 2017 had no financial impact on the Company’s consolidated financial statements.

2016-13,

New Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue recognition standard provides a five-step analysis of contracts to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 for all entities by one year to annual reporting periods beginning after December 15, 2017. The FASB has issued several updates subsequently, including implementation guidance on principal versus agent considerations, on how an entity should account for licensing arrangements with customers, and to improve guidance on assessing collectability, presentation of sales taxes, noncash consideration, and contract modifications and completed contracts at transition. The amendments in this series of updates shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company plans to adopt Topic 606, with a date of initial application of January 1, 2018 using the modified retrospective method applied to all contracts existing as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 will be presented under Topic 606, while prior period amounts will not be adjusted and will be reported in accordance with Topic 605. The financial statement impact of the adoption of the new standard is not expected to be material.

Below is a summary of the Company’s analysis under Topic 606:

The Company will generally continue to recognize revenue when product is delivered to its Members. For China independent service providers, and for third party importers utilized in certain other countries where sales historically have not been material, the Company will continue to recognize revenue based on the Company’s estimate of when the service provider or third party importer sells the products because the Company is deemed to be the principal party of these product sales under Topic 606 due to the additional selling and operating requirements relating to pricing of products, conducting business with physical locations, and other selling and marketing activities required of the service providers and third party importers; this timing difference relating to the Company recognizing revenues when these third party entities sell the products compared to when the Company delivers the products to them did not have a material impact to the Company’s consolidated net sales for the periods presented.

The Company’s Members, excluding its China independent service providers, may receive distributor allowances, which are comprised of discounts, rebates and wholesale commission payments from the Company. Pursuant to Topic 606, the distributor allowances resulting from the Company’s sales of its products to its Members will continue to be recorded against net sales because the distributor allowances represent discounts from the suggested retail price.

The Company compensates its sales leader Members with royalty overrides for services rendered, relating to the development, retention, and management of their sales organizations. Royalty overrides are payable based on achieved sales volume. Royalty overrides will continue to be classified as an operating expense reflecting the services provided to the Company. The Company compensates its China independent service providers and third party importers utilized in certain other countries for providing marketing, selling, and customer support services. Under Topic 606, as the Company is the principal party of the product sales as described above, the service fees payable to China independent service providers and the compensation received by third party importers for the services they provide will be recorded within Selling, general & administrative expenses. Currently, under Topic 605, the service fees payable to its China independent service providers are similarly recognized within Selling, general & administrative expenses as they will be under Topic 606. However, under Topic 605, the compensation received by third party importers for the services they provide, which represents the discount provided to them, is recorded as a reduction to net sales, which differs from the treatment under Topic 606 as described above. This change in the accounting treatment under Topic 606 of the compensation for services provided by the Company’s third party importers will not impact the Company’s consolidated net income and is not material to the Company’s consolidated net sales for the fiscal years presented.

The Company also reviewed its United States business and the changes required to be made pursuant to the FTC consent order. The Company has concluded that there will be no material financial impact under Topic 606 and the Company will continue to recognize revenues when it delivers the products to its United States Members; its distributor allowances, inclusive of discounts and wholesale commissions, will continue to be recorded as a reduction to net sales, and royalty overrides will continue to be classified as an operating expense under Topic 606.

Shipping and handling services relating to product sales will be recognized as fulfillment activities on the Company’s performance obligation to transfer products and will therefore be recorded within net sales as part of product sales and will not be considered as separate revenues under Topic 606. Shipping and handling costs paid by the Company are currently included in cost of sales and these costs will continue to be recorded to cost of sales under Topic 606.


In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10):Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments by modifying how entities measure and recognize equity investments and present changes in the fair value of financial liabilities, and by simplifying the disclosure guidance for financial instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2017. The amendments in this update should be applied prospectively. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and subsequently issued additional updates to Topic 842.The updated guidance requires lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is evaluating the potential impact of this adoption on its consolidated financial statements; however, increases in both assets and liabilities are expected.

In March 2016, the FASB issued ASU No. 2016-04, Liabilities — Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. This ASU requires entities that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage (i.e. the value that is ultimately not redeemed by the consumer) in a way that is consistent with how it will be recognized under the new revenue recognition standard. Under current U.S. GAAP, there is diversity in practice in how entities account for breakage that results when a consumer does not redeem the entire product balance. This ASU clarifies that an entity’s liability for prepaid stored-value products within its scope meets the definition of a financial liability. The amendments in this update are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The amendment may be applied using either a modified retrospective approach or a full retrospective approach. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instrument — Credit Losses (Topic

 326): Measurement of Credit Losses on Financial Instruments
. This ASU changes the impairment model for most financial assets, requiring the use of an expected loss model which requires entities to estimate the lifetime expected credit loss on financial assets measured at amortized cost. Such credit losses will be recorded as an allowance to offset the amortized cost of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. In addition, credit losses relating to
available-for-sale
debt securities will now be recorded through an allowance for credit losses rather than as a direct write-down to the security. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted for reporting periods beginning after December 15, 2018. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides clarification on eight specific cash flow issues regarding presentation and classification in the statement of cash flows with the objective of reducing the existing diversity in practice. The amendments in this update are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in this update should be applied retrospectively. The adoption of this guidance willduring the first quarter of 2020 did not have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update do not change U.S. GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. The amendments in this update are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments in this update are effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and must be applied retrospectively. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements but will result in a change in the presentation of restricted cash and restricted cash equivalents in the Company’s consolidated statement of cash flows.


In January 2017, the FASB issued ASU

No. 2017-04,
Intangibles — Goodwill and Other (Topic
 350): Simplifying the Test for Goodwill Impairment
. This ASU simplifies the test for goodwill impairment by removing Step 2 from the goodwill impairment test. Companies will now perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value not to exceed the total amount of goodwill allocated to that reporting unit.An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company is evaluating the potential impactadoption of this adoptionguidance during the first quarter of 2020 did not have a material impact on itsthe Company’s consolidated financial statements.

In May 2017,August 2018, the FASB issued ASU
No. 2017-09, Compensation2018-13,
Fair Value Measurement (Topic
 820): Disclosure FrameworkStock Compensation (Topic 718): Scope of Modification AccountingChanges to the Disclosure Requirements for Fair Value Measurement
. This ASU provides additional guidance for when a company should apply modification accounting when there is a change in eithermodifies the terms or conditions of a share-based payment award. Specifically, a company should not apply modification accounting if thedisclosure requirements on fair value vesting conditions,measurements in Topic 820 based on the consideration of costs and classificationbenefits to promote the appropriate exercise and discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of the award remains the same immediately beforeentities and after the modification.their auditors when evaluating disclosure requirements. The amendments in this update must be applied on a prospective basis and are effective for reporting periods beginning after December 15, 2017,2019, with early adoption permitted. The adoption of this guidance during the first quarter of 2020 did not have a material impact on the Company’s consolidated financial statements.
98

In August 2018, the FASB issued ASU
No. 2018-15,
Intangibles — Goodwill and Other —
Internal-Use
Software (Subtopic
 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. This ASU clarifies the accounting for implementation costs of a hosting arrangement that is a service contract and aligns that accounting, regardless of whether the arrangement conveys a license to the hosted software. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted the guidance with an initial application date of January 1, 2020 with prospective application to implementation costs incurred after January 1, 2020. The adoption of this guidance during the first quarter of 2020 did not have a material impact on the Company’s consolidated financial statements.
In November 2019, the FASB issued ASU No.
2019-08,
Compensation—Stock Compensation (Topic
 718) and Revenue from Contracts with Customers (Topic
 606): Codification Improvements—Share-Based Consideration Payable to a Customer
. This ASU clarifies the accounting for measuring share-based payment awards granted to a customer. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance during the first quarter of 2020 did not have a material impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU
No. 2020-04,
Reference Rate Reform (Topic
 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments in this update are effective as of March 12, 2020 through December 31, 2022. The adoption of this guidance during the first quarter of 2020 did not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncements
In August 2018, the FASB issued ASU
No. 2018-14,
Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic
 715-20):
Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans
. This ASU removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. The amendments in this update are effective for reporting periods beginning after December 15, 2020, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In August 2017,December 2019, the FASB issued ASU
No. 2017-12, Derivatives and Hedging: Targeted Improvements to2019-12,
Income Taxes (Topic
 740): Simplifying the Accounting for Hedging ActivitiesIncome Taxes
. This ASU improvessimplifies the financial reportingaccounting for income taxes by eliminating some exceptions to the general approach in ASC Topic 740,
Income Taxes
, and clarifies certain aspects of hedging relationshipsthe existing guidance to better portray the economic results of an entity's risk management activities in its financial statements and makes certain targeted improvements to simplify thepromote more consistent application, of existing hedge accounting guidance.among other things. The amendments in this update are effective for reporting periods beginning after December 15, 2018,2020, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU
No. 2020-06,
Debt — Debt with Conversion and Other Options (Subtopic
 470-20)
and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic
 815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
. This ASU simplifies the accounting for convertible instruments by eliminating certain accounting models, resulting in fewer embedded conversion features being separately recognized from the host contract, and also amends the guidance for derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. Additionally, the amendments in this ASU affect the diluted EPS calculation for convertible instruments. It will require that the effect of potential share settlement be included in the diluted EPS calculation when a convertible instrument may be settled in cash or shares; the
if-converted
method as opposed to the treasury stock method would be required to calculate diluted EPS for these types of convertible instruments. The amendments in this update are effective for reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

Reclassifications

In order to improve and simplify the Company’s financial statements, the following reclassifications have been made:

Certain reclassifications were made to the prior period consolidated balance sheets, the consolidated statements

99

Significant Accounting Policies

Consolidation Policy

The consolidated financial statements include the accounts of Herbalife Nutrition Ltd. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated.

Foreign Currency Translation and Transactions

In the majority of the countries that the Company operates, the functional currency is the local currency. The Company’s foreign subsidiaries’ asset and liability accounts are translated for consolidated financial reporting purposes into U.S. dollar amounts at
year-end
exchange rates. Revenue and expense accounts are translated at the average rates during the year. Foreign exchange translation adjustments are included in accumulated other comprehensive loss on the accompanying consolidated balance sheets. Foreign currency transaction gains and losses, which include the cost of foreign currency derivative contracts and the related settlement gains and losses but excluding certain foreign currency derivatives designated as cash flow hedges as discussed in Note 11,
Derivative Instruments and Hedging Activities
, are included in selling, general, and administrative expenses inwithin the accompanying consolidated statements of income. The Company recorded net foreign currency transaction losses of $13.7$14.8 million, $11.4$2.0 million, and $34.7$17.3 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015, respectively, which includes the foreign exchange impact relating to the Company’s Venezuelan subsidiary, Herbalife Venezuela.

2018, respectively.

Forward Exchange Contracts,

Option Contracts, and Interest Rate Swaps

The Company enters into foreign currency derivatives, primarily comprised of foreign currency forward contracts and option contracts, in managing its foreign exchange risk on sales to Members, inventory purchases denominated in foreign currencies, and intercompany transactions and loans. The Company also enters into interest rate swaps in managing its interest rate risk on its variable rate senior secured credit facility. The Company does not use the contracts for trading purposes.

In accordance with FASB ASC Topic 815,
Derivatives and Hedging
, or ASC 815, the Company designates certain of its derivative instruments as cash flow hedges and formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction, at the time the derivative contract is executed. The Company assesses the effectiveness of the hedge both at inception and on an ongoing basis and determines whether the hedge is highly or perfectly effective in offsetting changes in cash flows of the hedged item. The Company records the effective portion of changes in the estimated fair value in accumulated other comprehensive income (loss)loss and subsequently reclassifies the related amount of accumulated other comprehensive income (loss)loss to earnings when the hedged item and underlying transaction impacts earnings. If it is determined that a derivative has ceased to be a highly effective hedge, the Company will discontinue hedge accounting for such transaction. For derivatives that are not designated as hedges, all changes in estimated fair value are recognized in the consolidated statements of income.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are comprised primarily of foreigndomestic and domesticforeign bank accounts and money market funds. These cash and cash equivalents are valued based on levelLevel 1 inputs, which consist of quoted prices in active markets. To reduce its credit risk, the Company monitors the credit standing of the financial institutions that hold the Company’s cash and cash equivalents.

The Company has a cash pooling arrangement with a financial institution for cash management purposes. This cash pooling arrangement allows certain of the Company’s participating subsidiaries to withdraw cash from this financial institution based upon the Company’s aggregate cash deposits held by subsidiaries who participate in the cash pooling arrangement. To the extent any participating location on an individual basis is in an overdraft
100

position, these overdrafts will be recorded as liabilities and reflected as financing activities in the Company’s consolidated balance sheets and consolidated statementstatements of cash flows, respectively. As of December 31, 2017 and December 31, 2016, theThe Company did not owe any amounts to this financial institution.

institution as of December 31, 2020 and 2019.

Accounts Receivable

Accounts receivable consist principally of receivables from credit card companies, arising from the sale of products to the Company’s Members, and receivables from importers, who are utilized in a limited number of countries to sell products to Members. The Company believes the concentration of its collection risk related to its credit card receivables is diminishedreduced due to the geographic dispersion of its receivables. Thedispersion. Credit card receivables from credit card companies were $68.1$65.2 million and $51.8$56.0 million as of December 31, 20172020 and 2016,2019, respectively. Substantially all of the receivables from credit card companiesreceivables were current as of December 31, 20172020 and 2016. Although2019. For the Company’s receivables from its importers, can be significant, the Company performs ongoing credit evaluations of its importers and maintains an allowance for potential credit losses. The Company considers customer credit-worthiness, past and current transaction history with the customer, contractual terms, current economic industry trends, and changes in customer payment terms when determining whether collectability is reasonably assured and whether to record allowances for its receivables. If the financial condition of the Company’s customers deteriorates and adversely affects their ability to make payments, additional allowances will be recorded. The Company believes that it provides adequate allowances for receivables from its Members and importers which are not material to its consolidated financial statements. DuringThe Company recorded $1.7 million, $3.0 million, and $1.2 million during the years ended December 31, 2017, 2016,2020, 2019, and 2015, the Company recorded $0.9 million, $1.0 million, and $3.7 million,2018, respectively, in
bad-debt
expense related to allowances for the Company’s receivables. As of December 31, 20172020 and 2016,2019, the Company’s allowance for doubtful accounts was $1.2$3.3 million and $1.3$2.5 million, respectively. As of December 31, 20172020 and 2016,2019, the majority of the Company’s total outstanding accounts receivable were current.

Fair Value of Financial Instruments

The Company applies the provisions of FASB authoritative guidance as it applies to its financial and
non-financial
assets and liabilities. The FASB authoritative guidance clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about fair value measurements.

The Company has estimated the fair value of its financial instruments using the following methods and assumptions:

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to the short-term maturities of these instruments;


The fair value of available-for-sale investments are based on prices of similar assets traded in active markets and observable yield curves;

The fair value of option and forward contracts are based on dealer quotes;

The Company’s variable ratevariable-rate revolving credit facility is recorded at carrying value and is considered to approximate its fair value;

The fair value of the outstanding borrowings on the Company’s term loan A under its senior secured credit facility are recorded at carrying value, and their fair value is determined by utilizing

over-the-counter
market quotes;

quotes for similar instruments;

The outstanding borrowings on the Company’s term loan B under its senior secured credit facility are recorded at carrying value, and their fair value is determined by utilizing

over-the-counter
market quotes;
The Company’s convertible senior notes issued in February 2014, or the Convertible Notes, are recorded at carrying value and their fair value is determined using two valuation methods. The Company reviewed market data that was available for publicly traded, senior, unsecured nonconvertible corporate bonds issued by companies with similar credit ratings. Assumptions usedmethods as described further in the estimate represent what market participants would use in pricing the liability component, including market yields and credit standing to develop the straight debt yield estimate. The Company also used a lattice model, which included inputs such as stock price, the Convertible Notes trading price, volatility and dividend yield as of December 31, 2017, to estimate the straight debt yield. The Company combined the results of the two valuation methods to determine the fair value of the liability component of the Convertible Notes. See Note 4, 5,
Long-Term Debt for a further description;
; and

The Company’s senior notes issued in August 2018, or the 2026 Notes, and senior notes issued in May 2020, or the 2025 Notes, are recorded at carrying value, and their fair valuevalues are determined by utilizing

over-the-counter
market quotes and yield curves.
101

Inventories

Inventories

Inventories are stated at lower of cost (primarily on the
first-in,
first-out
basis) and net realizable value.

Debt Issuance Costs

Debt issuance costs represent fees and expenses related to the borrowing of the Company’s long-term debt and are generally amortized over the term of the related debt using the effective interest method. Debt issuance costs, except for those related to the Company’s revolving credit facility, are recorded as a reduction to debt (contra-liability) within the Company’s consolidated balance sheets. Total amortization expense related to debt issuance costs were $8.4$4.6 million, $7.9$5.3 million, and $8.5$7.3 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. As of December 31, 20172020 and 2016,2019, the Company’s remaining unamortized debt issuance cost was $26.2costs were $25.4 million and $11.9$21.2 million, respectively.

Long-Lived Assets

As of December 31, 20172020 and 2016,2019, the Company’s net property, plant, and equipment consisted of the following (in millions):

following:

 

 

December 31,

 

 

 

2017

 

 

2016

 

Property, plant and equipment — at cost:

 

 

 

 

 

 

 

 

Land and building

 

$

51.0

 

 

$

51.0

 

Furniture and fixtures

 

 

26.7

 

 

 

25.9

 

Equipment

 

 

803.5

 

 

 

719.8

 

Building and leasehold improvements

 

 

199.0

 

 

 

185.7

 

 

 

 

1,080.2

 

 

 

982.4

 

Less: accumulated depreciation and amortization

 

 

(702.7

)

 

 

(604.4

)

Net property, plant and equipment

 

$

377.5

 

 

$

378.0

 

   
December 31,
 
   
2020
   
2019
 
   
(in millions)
 
Property, plant, and equipment, at cost:
    
Land and buildings
  $51.1   $51.1 
Furniture and fixtures
   26.1    26.2 
Equipment
   1,023.7    931.3 
Building and leasehold improvements
   222.8    208.2 
          
Total property, plant, and equipment, at cost
   1,323.7    1,216.8 
Less: accumulated depreciation and amortization
   (933.5   (845.3
          
Property, plant, and equipment, at cost, net of accumulated depreciation and amortization
  $390.2   $371.5 
          

In December 2012, the Company purchased an approximate 800,000 square foot facility in Winston-Salem, North Carolina, for approximately $22.2 million. The Company allocated $18.8 million and $3.4 million between buildings and land respectively, based on their relative fair values. In April 2016, the Company purchased one1 of its office buildings in Torrance, California, which it had previously leased, for approximately $29.6 million. The Company allocated $16.9 million and $11.6 million, which was net of the deferred rent liability of $1.1 million, between buildings and land, respectively, based on their relative fair values. As of December 31, 20172020 and 2016,2019, these amounts have been reflected in property, plant, and equipment onwithin the Company’s accompanying consolidated balance sheets.

Depreciation of furniture, fixtures, and equipment (includes(including computer hardware and software)soft
w
are) is computed on a straight-line basis over the estimated useful lives of the related assets, which range from three to ten years. The Company capitalizes eligible costs to acquire or develop
internal-use
software that are incurred subsequent to the preliminary project stage. Computer hardware and software, the majority of which is comprised of capitalized
internal-use
software costs, was $157.3were $188.7 million and $145.7$177.4 million as of December 31, 20172020 and 2016,2019, respectively, net of accumulated depreciation. Leasehold improvements are amortized on a straight-line basis over the life of the related asset or the term of the lease, whichever is shorter. Buildings are depreciated over 40 years. Building improvements are generally depreciated over ten to fifteen years. Land is not depreciated. Depreciation and amortization expenses recorded to selling, general, and administrative expenses totaled $80.1$80.9 million, $80.7$78.8 million, and $82.5$80.8 million, for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively.

102

Long-lived assets are reviewed for impairment based on undiscounted cash flows
whenever
events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of an impairment loss is based on the estimated fair value of the asset.

Goodwill and marketing relatedmarketing-related intangible assets with indefinite lives are evaluated on an annual basis for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. For goodwill, the Company usesperformed a qualitative assessment during the fourth quarter of 2020 and determined that it is not more likely than not that the fair value of each reporting unit is less than its respective carrying value. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if a qualitative assessment is not performed, then the Company would perform the quantitative goodwill impairment test as required, in which it would use a discounted cash flow approach to estimate the fair value of a reporting unit. If the fair value of the reporting unit is less than the carrying value, then the implied fair value of the goodwill must be determined. If the implied fair value of the goodwill is less than its carrying value then a goodwill impairment amount is recorded for the difference. For the marketing relatedmarketing-related intangible assets, the Company usesperformed a qualitative assessment during the fourth quarter of 2020 and determined that it is not more likely than not that the fair value of the assets is less than their carrying value. If it is determined that it is more likely than not that the fair value of the assets is less than their carrying amount or if a qualitative assessment is not performed, then the Company would perform the quantitative impairment test as required, in which it would use a discounted cash flow model under the relief-from-royalty method in order to determine the fair value. If the fair value is less than its carrying value, then an impairment amount is recorded for the difference. During the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, there were no additions to goodwill or marketing related intangible assets
or impairments of goodwill or marketing relatedmarketing-related intangible assets. As of both December 31, 20172020 and 2016,2019, the marketing-related intangible asset balance was $310.0 million whichand consisted of the Company’s trademark, trade name, and marketing franchise. As of
During the year ended 
December 31, 20172020, goodwill
increased by
$9.0 million,
of which
 $7.0 million was due to an immaterial acquisition and 2016, the goodwill balance$2.0 million was $96.9 million and $89.9 million, respectively. The increase in goodwill duringdue to foreign currency translation
adjustments
.
During the year ended December 31, 20172020, there was due0 impairment of goodwill. During the years ended December 31, 2019 and 2018, there were no additions to cumulative translation adjustments.

Other Assets

Other assets onor impairments of goodwill. As of December 31, 2020 and 2019, the goodwill balance was $100.5 million and $91.5 million, respectively. The cash paid for the immaterial acquisition during 2020 is reflected as other cash flows from investing activities within the Company’s accompanyingconsolidated statements of cash flows. 

Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance sheets include deferred tax assetsthat sum to the total of $77.5 millionthe same such amounts shown in the Company’s consolidated statements of cash flows:
   
December 31,
 
   
2020
   
2019
 
   
(in millions)
 
Cash and cash equivalents
  $1,045.4   $839.4 
Restricted cash included in Prepaid expenses and other current assets
   2.5    2.5 
Restricted cash included in Other assets
   6.1    5.6 
          
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
  $1,054.0   $847.5 
          
The majority of the Company’s consolidated restricted cash is held by certain of its foreign entities and $155.2 million asconsists of December 31, 2017 and 2016, respectively. See Note 14, Detail of Certain Balance Sheet Accounts, for a further description of other assets.

cash deposits that are required due to the business operating requirements in those jurisdictions.

Income Taxes

Income tax expense includes income taxes payable for the current year and the change in deferred income tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s
103

financial statements or income tax returns. A valuation allowance is recognized to reduce the carrying value of deferred income tax assets if it is believed to be more likely than not that a component of the deferred income tax assets will not be realized.

The Company accounts for uncertainty in income taxes in accordance with FASB authoritative guidance which clarifies the accounting and reporting for uncertainties in income taxes recognized in an enterprise’s financial statements. This guidance prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.


On December 22, 2017, the U.S. enacted the 2017 Tax Cuts and Jobs Act of 2017, which containscontained several key tax provisions that affectaffected the Company, including, but not limited to, a
one-time
mandatory transition tax on accumulated foreign earnings, changes in the sourcing and calculation of foreign income, and a reduction of the corporate income tax rate to 21% effective January 1, 2018. The Company iswas required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring its U.S. deferred tax assets and liabilities as well as reassessing the net realizability of its deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
, which allowsallowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. See Note 12,
Income Taxes
, for a further description on income taxes and the impact of the U.S. Tax Reform.

The Company has made an accounting policy election to account for global intangible

low-taxed
income as a period cost if and when incurred.
Royalty Overrides

Certain Members may earn commissions called royalty overrides, which include production bonuses, based on retail sales volume. Royalty overrides are based on the retail sales volume of certain other Members who are sponsored directly or indirectly by the Member. Royalty overrides are recorded when the products are delivered and revenue is recognized. The royalty overrides are compensation to Members for services rendered including the development, retention and the improved productivity of their sales organizations. As such royalty overrides are classified as an operating expense.
Non-U.S.
royalty override checks that have aged, for a variety of reasons, beyond a certainty of being paid, are taken back into income. Management has estimated this period of certainty to be three years worldwide.

Distributor Compensation – U.S.

In the U.S., distributor compensation, including Royalty Overrides,overrides, is capped if the Company does not meet an annual requirement as described in the consent order discussed in more detail in Note 7,
Contingencies
. On a periodic basis, the Company evaluates if this requirement will be achieved by year end
year-end
to determine if a cap on distributor compensation will be required, and then determines the appropriate amount of distributor compensation expense, which may vary in each reporting period. As of December 31, 2017, theThe Company believesdetermined that the cap to distributor compensation will not be applicable for the year ended December 31, 2017.

2020 as the annual requirement was met.

Comprehensive Income

Comprehensive income consists of net income, foreign currency translation adjustments, the effective portion of the unrealized gains or losses on derivatives, and unrealized gains or losses on available-for-sale investments.derivatives. See Note 8,
Shareholders’ (Deficit) EquityDeficit
, for the description and detail of the components of accumulated other comprehensive loss.

Operating Leases

The Company leases most of its physical properties under operating leases. The Company recognizes rent expense on a straight-line basis for its operating leases. Certain lease agreements generally include rent holidays and tenant improvement allowances. ThePrior to January 1, 2019, the Company recognizesrecognized rent holiday periods on a straight-line basis over the lease term beginning when the Company hashad the right to the leased space. The space; the
104

Company also recordsrecorded tenant improvement allowances and rent holidays as deferred rent liabilities and amortizesamortized the deferred rent over the terms of the lease to rent expense.

Prior to January 1, 2019, the Company did not recognize its operating leases on its balance sheet. Beginning January 1, 2019, the Company recognizes a right of use asset and lease liability within its consolidated balance sheets for operating leases with terms greater than twelve months. The initial measurement of the lease liability is measured at the present value of lease payments not yet paid discounted generally using the Company’s incremental borrowing rate at the commencement date. Leases with an initial term of twelve months or less are not recorded on the Company’s consolidated balance sheets, and the Company does not separate nonlease components from lease components.

Research and Development

The Company’s research and development is performed by
in-house
staff and outside consultants. For all periods presented, research and development costs were expensed as incurred and were not material.

Other Operating Income

To encourage local investment and operations, governments in various China provinces conduct grant programs. The Company applied for and received several such grants in China. Government grants are recorded into income when a legal right to the grant exists, there is a reasonable assurance that the grant proceeds will be received, and the substantive conditions under which the grants were provided have been met. DuringGenerally, these substantive conditions are the Company maintaining operations and paying certain taxes in the relevant province and obtaining government approval by completing an annual application process. The Company believes the continuing obligation with respect to the funds is a general requirement that they are used only for its business in China. The Company recognized government grant income related to its regional headquarters and distribution centers within China of approximately $14.5 million, $31.5 million, and $29.8 million during the years ended December 31, 2017, 2016,2020, 2019, and 2015, the Company recognized government grant income of approximately $50.8 million, $34.2 million, and $6.5 million,2018, respectively, in other operating income within its consolidated statements of income, related to its regional headquarters and distribution centers within China.income. The Company intends to continue applying for government grants in China when programs are available; however, there is no assurance that the Company will receive grants in future periods.


On October 30, 2016, an arbitration tribunal awardedDuring the year ended December 31, 2019, the Company approximately $29.7also recognized $6.0 million in connection with the re-audit of the Company’s 2010 to 2012 financial statements after the resignation of KPMG as the Company’s independent registered public accounting firm. This amount has been recognized in other operating income within its consolidated statement of income related to the finalization of insurance recoveries in connection with the flooding at one of its warehouses in Mexico during September 2017, which damaged certain of the Company’s consolidated financial statements inventory stored within the warehouse. See Note 7,

Contingencies
, to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2016.

2018 for further discussion.

Other Expense (Income), Net
During the year ended December 31, 2020, the Company did 0t recognize any other expense (income), net. During the year ended December 31, 2019, the Company recognized a gain of $15.7 million on the revaluation of the
non-transferable
contractual contingent value right, or CVR, provided for each share tendered in the October 2017 modified Dutch auction tender offer (See Note 8,
Shareholders’ Deficit
) in other expense (income), net within its consolidated statements of income. During the year ended December 31, 2018, the Company recognized a loss of $8.8 million on the revaluation of the CVR; a $13.1 million loss on the extinguishment of $475.0 million aggregate principal amount of the 2019 Convertible Notes (See Note 5,
Long-Term Debt
); and a $35.4 million loss on extinguishment of the Company’s 2017 senior secured credit facility (See Note 5,
Long-Term Debt
) in other expense (income), net within its consolidated statements of income.
These
non-cash
expenses are included as
non-cash
adjustments to net income in the Company’s cash flows from operating activities within its consolidated statements of cash flows.
105

Professional Fees

The Company expenses professional fees, including legal fees, as incurred. These professional fees are included in selling, general, and administrative expenses inwithin the Company’s consolidated statements of income.

Advertising

Advertising costs, including Company sponsorships, are expensed as incurred and amounted to approximately $55.7$39.0 million, $64.8$41.4 million, and $66.1$41.1 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. These expenses are included in selling, general, and administrative expenses inwithin the accompanyingCompany’s consolidated statements of income.

Earnings Per Share

Basic earnings per share represents net income for the period common shares were outstanding, divided by the weighted averageweighted-average number of common shares outstanding for the period. Diluted earnings per share represents net income divided by the weighted averageweighted-average number of common shares outstanding, inclusive of the effect of dilutive securities, such as outstanding stock options, stock appreciation rights, or SARs, stock units, and stock units.

convertible notes.

The following are the common share amounts used to compute the basic and diluted earnings per share for each period (in millions):

period:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Weighted average shares used in basic computations

 

 

79.2

 

 

 

83.0

 

 

 

82.6

 

Dilutive effect of exercise of equity grants outstanding

 

 

3.7

 

 

 

3.1

 

 

 

2.7

 

Weighted average shares used in diluted computations

 

 

82.9

 

 

 

86.1

 

 

 

85.3

 

   
Year Ended December 31,
 
   
2020
   
2019
   
2018
 
   
(in millions)
 
Weighted-average shares used in basic computations
   131.5    137.4    140.2 
Dilutive effect of exercise of equity grants outstanding
   3.0    3.5    6.3 
Dilutive effect of 2019 Convertible Notes
   —      0.7    3.0 
               
Weighted-average shares used in diluted computations
   134.5    141.6    149.5 
               
There were an aggregate of 3.40.8 million, 4.50.8 million, and 5.41.4 million of equity grants, consisting of stock options, SARs and stock units that were outstanding during the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, but were not included in the computation of diluted earnings per share because their effect would be anti-dilutive or the performance condition of the award had not been satisfied.

Since the Company willwas required to settle the principal amount of its 2019 Convertible Notes in cash and settle the conversion feature for the amount above the conversion price in common shares, or the conversion spread, the Company used the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread would have had a dilutive impact on diluted earnings per share when the average market price of the Company’s common shares for a given period exceeded the conversion price of the 2019 Convertible Notes. The dilutive impacts for the years ended December 31, 2019 and 2018 are disclosed in the table above. The initial conversion rate and conversion price for the 2019 Convertible Notes are described further in Note 5,
Long-Term Debt
.
For the 2024 Convertible Notes, the Company has the intent and ability to settle the principal amount in cash and intends to settle the conversion feature for the amount above the conversion price, or the conversion spread, in common shares. The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common shares for a given period exceeds the initial conversion price of $86.28 per share.the 2024 Convertible Notes. For the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, the 2024 Convertible Notes have been excluded from the computation of diluted earnings
106

per share, as the effect would be anti-dilutive since the conversion price of the 2024 Convertible Notes exceeded the average market price of the Company’s common shares for the years ended December 31, 2017, 2016,2020, 2019, and 2015.2018. The initial conversion rate and conversion price isfor the 2024 Convertible Notes are described further in Note 4, 5,
Long-Term Debt
.

The capped call transactions executed in connection with the issuance of the 2019 Convertible Notes, areor the Capped Call Transactions, were excluded from the calculation of diluted earnings per share because their impact is always anti-dilutive. Additionally, the prepaid forward share repurchase transactions executed in connection with the issuance of the 2019 Convertible Notes, areor the Forward Transactions, were treated as retired shares for basic and diluted EPS purposes, although they remain legally outstanding.in each case for the periods the transactions were in effect. On August 15, 2019, the remaining Capped Call Transactions expired unexercised and all shares were retired under the Forward Transactions. See Note 4, Long-Term Debt8,
Shareholders’ Deficit
, for additional discussion regarding the capped call transactionsCapped Call Transactions and forward transactions.

Forward Transactions.

See Note 8,
Shareholders’ Deficit

, for a discussion of how common shares repurchased by the Company’s indirect wholly-owned subsidiary are treated under U.S. GAAP.
Revenue Recognition

The Company’s net sales consist of product sales. In general, the Company’s performance obligation is to transfer its products to its Members. The Company generally recognizes revenue upon delivery and when both the title and risk and rewards passproduct is delivered to the Member or importer, or as products are sold inits Members. For China to and through independent service providers and for third-party importers utilized in certain other countries where sales representatives,historically have not been material, the Company recognizes revenue based on the Company’s estimate of when the service provider or third-party importer sells the products because the Company is deemed to be the principal party of these product sales due to the additional selling and operating requirements relating to pricing of products, conducting business with physical locations, and other selling and marketing activities required of the service providers and third-party importers.
The Company’s Members, excluding its China independent service providers, may receive distributor allowances, which are comprised of discounts, rebates, and wholesale commission payments from the Company. Distributor allowances resulting from the Company’s sales officersof its products to customers and preferred customers, as well as through Company-operated retail stores when necessary. See Note 10, Segment Information, for information regardingits Members are recorded against net sales because the distributor allowances represent discounts from the suggested retail price.
The Company compensates its sales leader Members with royalty overrides for services rendered relating to the development, retention, and management of their sales organizations. Royalty overrides are payable based on achieved sales volume. Royalty overrides are classified as an operating expense reflecting the services provided to the Company. The Company compensates its China independent service providers and third-party importers utilized in certain other countries for providing marketing, selling, and customer support services. As the Company is the principal party of the product sales as described above, the service fees payable to China independent service providers and the compensation received by geographic area.

Productthird-party importers for the services they provide, which represents the discount provided to them, are recorded in selling, general, and administrative expenses within the Company’s consolidated statements of income.

The Company recognizes revenue when it delivers products to its United States Members; distributor allowances, inclusive of discounts and wholesale commissions, are recorded as a reduction to net sales; and royalty overrides are classified as an operating expense.
Shipping and handling services relating to product sales are recognized as fulfillment activities on the Company’s performance obligation to transfer products and are therefore recorded within net of product returns and discounts referred tosales as “distributor allowances.” Net sales includepart of product sales and the related shipping and handlingare not considered as separate revenues. Shipping and handling revenues related to product sales were $227.4 million, $244.2 million, and $282.5 million for the years ended December 31, 2017, 2016, and 2015, respectively. Shipping and handling costs paid by the Company are included in cost of sales.
107

The Company presents sales taxes collected from customers on a net basis.
The Company generally receives the net sales price in cash or through credit card payments at the point of sale.
The Company currently presentsrecords advance sales taxes collected from customersdeposits when payment is received but revenue has not yet been recognized. In the majority of the Company’s markets, advance sales deposits are generally recorded to income when the product is delivered to its Members. Additionally, advance sales deposits also include deferred revenues due to the timing of revenue recognition for products sold through China independent service providers. The estimated deferral period for advance sales deposits is generally within one week. During the year ended December 31, 2020, the Company recognized substantially all of the revenues that were included within advance sales deposits as of December 31, 2019 and any remaining such balance was not material as of December 31, 2020. Advance sales deposits are included in other current liabilities on the Company’s consolidated balance sheets. See Note 14,
Detail of Certain Balance Sheet Accounts
, for further information.
In general, if a Member returns product to the Company on a net basis.timely basis, they may obtain replacement product from the Company for such returned products. In addition, in general the Company maintains a buyback program pursuant to which it will repurchase products sold to a Member who has decided to leave the business. Allowances for product returns, primarily in connection with the Company’s buyback program, are provided at the time the sale is recorded. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months following the original sale. Allowances for product returns were $3.9 million, $3.9$3.7 million and $3.9$4.7 million as of December 31, 2017, 2016,2020 and 2015,2019, respectively. Product returns were $4.4 million, $4.5 million,
The Company’s products are grouped in five principal categories: weight management; targeted nutrition; energy, sports, and $5.0 million duringfitness; outer nutrition; and literature and promotional items. However, the years ended December 31, 2017, 2016,effect of economic factors on the nature, amount, timing, and 2015, respectively.

uncertainty of revenue recognition and cash flows are similar among all 5 product categories. The Company defines its operating segments through 6 geographic regions. The effect of economic factors on the nature, amount, timing, and uncertainty of revenue recognition and cash flows are similar among the geographic regions within the Company’s Primary Reporting Segment. See Note 10,

Segment Information
, for further information on the Company’s reportable segments and the Company’s presentation of disaggregated revenue by reportable segment.
Non-Cash
Investing and Financing Activities

During the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, the Company recorded $10.1$18.0 million, $12.7$14.1 million, and $12.3$10.2 million, respectively, of
non-cash
capital expenditures. In addition, during
During the year ended December 31, 2015,2020, the Company recorded $15.0 million of a did 0t record any
non-cash release of deposits in escrow
borrowings that were used to reduce the Company’s accrued expense liability.

finance software maintenance. During the yearsyear ended December 31, 2017, 2016, and 2015,2019, the Company recorded $2.3$5.9 million $20.8 million, and $17.3 million of

non-cash
borrowings that were used to finance software maintenance. During the year ended December 31, 2018, the Company did 0t record any
non-cash
borrowings that were used to finance software maintenance. Additionally, see Note 8,
Shareholders’ (Deficit) EquityDeficit
,
for information on the Company’s
non-cash
financing activities related to the non-transferable contractual contingent value right, or CVR, in connection with the Company’s modified Dutch auction tender offer, as well as share repurchases for which payment was made subsequent to year end.

Share-Based Payments

The Company accounts for share-based compensation in accordance with FASB authoritative guidance which requires the measurement of share-based compensation expense for all share-based payment awards made to employees. The Company measures share-based compensation cost at the grant date, based on the fair value of the award. The Company recognizes share-based compensation expense for service condition awards on a straight-line basis over the employee’s requisite service period. The Company recognizes share-based compensation expense for performance condition awards over the vesting term using the graded vesting method.

108

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which the Company believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, and foreign currency have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.


COVID-19

Pandemic

During March 2020, the World Health Organization characterized the outbreak of coronavirus disease 2019, or
COVID-19,
as a pandemic. In response to the spread of
COVID-19,
certain government agencies and the Company itself have mandated various measures and recommended others, in each to protect the public and the Company’s employees, which have disrupted certain areas of the Company’s business including, but not limited to, distribution and selling activities. Despite the pandemic having a negative impact in certain of the Company’s markets, the Company’s consolidated net sales was higher for the year ended December 31, 2020 as compared to the same period in 2019 and its cash and cash equivalents as of December 31, 2020 increased as compared to December 31, 2019. The ultimate extent and magnitude of the impact of
COVID-19
is not known and could have a material adverse impact to the Company’s business and future financial condition and results of operations. Management has been and continues to actively monitor the impact of
COVID-19
generally and on the Company.
The Company’s consolidated financial statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company believes it has used reasonable estimates and assumptions to assess the fair values of its goodwill, marketing-related intangible assets, and long-lived assets; assessment of the annual effective tax rate; valuation of deferred income taxes; and the allowance for doubtful accounts. After reviewing historical and forward-looking information, the Company determined there were no impairments required relating to its goodwill, marketing-related intangible assets, and long-lived assets during the year ended December 31, 2020.
3. Inventories

The following are the major classes of inventory (in millions):

inventory:

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

44.2

 

 

$

49.3

 

Work in process

 

 

4.8

 

 

 

3.9

 

Finished goods

 

 

292.2

 

 

 

318.1

 

Total

 

$

341.2

 

 

$

371.3

 

   
December 31,
 
   
2020
   
2019
 
   
(in millions)
 
Raw materials
  $80.1   $48.7 
Work in process
   7.9    6.6 
Finished goods
   413.4    380.9 
          
Total
  $501.4   $436.2 
          
109

4. Long-Term Debt

Long-term debt consists of the following:

Leases

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

Borrowings under prior senior secured credit facility, carrying value

 

$

 

 

$

410.0

 

Borrowings under new senior secured credit facility, carrying value

 

 

1,190.2

 

 

 

 

Convertible senior notes, carrying value of liability

    component

 

 

1,070.0

 

 

 

1,024.8

 

Other

 

 

7.9

 

 

 

13.1

 

Total

 

 

2,268.1

 

 

 

1,447.9

 

Less: current portion

 

 

102.4

 

 

 

9.5

 

Long-term portion

 

$

2,165.7

 

 

$

1,438.4

 

Senior Secured Credit Facility

On May 4, 2015,

Generally, the Company amended its prior senior secured credit facility,leases certain office space, warehouses, distribution centers, manufacturing centers, and equipment. A contract is or contains a lease if the Prior Credit Facility,contract conveys the right to extendcontrol the maturity dateuse of its revolving credit facility,identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company also rents or subleases certain real estate to third parties. Sublease income was not material for the Prior Revolving Credit Facility, by one year to March 9, 2017. Pursuant to this amendmentyears ended December 31, 2020, 2019, and upon execution, the Company made prepayments of approximately $20.3 million and $50.9 million on its $500 million term loan under the Prior Credit Facility, or the Prior Term Loan, and the Prior Revolving Credit Facility, respectively. Additionally,2018.
In general, the Company’s $700 million borrowing capacity on its Prior Revolving Credit Facility was reduced by approximately $235.9 million upon executionleases include one or more options to renew, with renewal terms that generally vary from one to ten years. The exercise of this amendment, and was further reduced by approximately $39.1 million on September 30, 2015. The Prior Term Loan matured on March 9, 2016 and was repaid in full. The total available borrowing capacity under the Prior Revolving Credit Facility was $425.0 million as of December 31, 2016. Prior to March 9, 2016, the interest rates onlease renewal options is generally at the Company’s borrowings undersole discretion. Certain leases also include options to purchase the Prior Credit Facility remained effectively unchanged except thatleased property. The depreciable life of assets and leasehold improvements are limited by the minimum applicable margin was increased by 0.50% and LIBOR was subject toexpected lease term, unless there is a minimum floortransfer of 0.25%. After March 9, 2016, the applicable interest rates on thetitle or purchase option reasonably certain of exercise.
The Company’s borrowings under the Prior Credit Facility increased by 2.00% such that borrowings under the Prior Credit Facility began bearing interest at either LIBOR plus the applicable margin between 4.00% and 5.00%lease agreements do not contain any material residual value guarantees or the base rate plus the applicable margin between 3.00% and 4.00%, based on the Company’s consolidated leverage ratio. The Company incurred approximately $6.2 millionmaterial restrictive covenants.
Leases with an initial term of debt issuance costs in connection with the amendment. These debt issuance costs weretwelve months or less are not recorded on the Company’s consolidated balance sheetsheets, and the Company does not separate nonlease components from lease components. The Company’s lease assets and liabilities recognized within its consolidated balance sheets were amortizedas follows:
   
December 31,
   
  
2020
  
2019
   
Balance Sheet Location
  
(in millions)
   
ASSETS:
             
Operating lease
right-of-use
assets
  $222.8   $189.5   Operating lease right-of-use assets
Finance lease
right-of-use
assets
   0.5    1.0   Property, plant, and equipment, at cost, net of accumulated depreciation and amortization(1)
              
Total lease assets
  $223.3   $190.5    
              
LIABILITIES:
             
Current:
             
Operating lease liabilities
  $35.5   $37.4   Other current liabilities
Finance lease liabilities
   0.2    0.6   Current portion of long-term debt
Non-current:
             
Operating lease liabilities
   206.7    169.9   Non-current operating lease liabilities
Finance lease liabilities
   0.3    0.5   Long-term debt, net of current portion
              
Total lease liabilities
  $242.7   $208.4    
              
(1)
Finance lease assets are recorded net of accumulated amortization of $1.7 million and $1.3 million as of December 31, 2020 and 2019, respectively.
110

Lease cost is recognized on a straight-line basis over the lifelease term. The components of lease cost are as follows:
   
Year Ended December 31,
  
    2020    
  
    2019    
  
(in millions)
Operating lease cost(1)(2)
   $63.8    $65.7 
Finance lease cost
            
Amortization of
right-of-use
assets
    0.4     0.4 
Interest on lease liabilities
    0—       0—   
             
Net lease cost
   $64.2    $66.1 
            
(1)
Includes short-term leases and variable lease costs, which were $11.0 million and $1.2 million, respectively, for the year ended December 31, 2020 and $11.2 million and $2.2 million, respectively, for the year ended December 31, 2019. Variable lease costs, which include items such as real estate taxes, common area maintenance, and changes based on an index or rate, are not included in the calculation of the
right-of-use
assets and are recognized as incurred.
(2)
Amount includes $60.2 million and $62.3 million recorded to selling, general, and administrative expenses within the Company’s consolidated statements of income for the years ended December 31, 2020 and 2019, respectively, and $3.6 million and $3.4 million capitalized as part of the cost of another asset, which includes inventories, for the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2018, the Company recognized rental expense of $61.1 million in selling, general, and administrative expenses within the Company’s consolidated statement of income pursuant to FASB ASC Topic 840,
Leases
.
As of December 31, 2020, annual scheduled lease payments were as follows:
   
Operating
Leases(1)
  
Finance Leases
   
(in millions)
2021
   $44.6    $0.2 
2022
    47.9     0.2 
2023
    31.7     0.1 
2024
    30.4     —   
2025
    23.6     —   
Thereafter
    127.1     —   
             
Total lease payments
    305.3     0.5 
Less: imputed interest
    63.1     —   
             
Present value of lease liabilities
   $242.2    $0.5 
             
(1)
Operating lease payments exclude $23.7 million of legally binding minimum lease payments for leases signed but not yet commenced.
In general, for the majority of the Prior RevolvingCompany’s material leases, the renewal options are not included in the calculation of its
right-of-use
assets and lease liabilities, as the Company does not believe that it is reasonably certain that these renewal options will be exercised. Periodically, the Company assesses its leases to determine whether it is reasonably certain that these renewal options will be exercised.
The majority of the Company’s leases are for real estate and in general, the individual lease contracts do not provide information about the rate implicit in the lease. Because the Company is not able to determine the rate implicit in its leases, it instead generally uses its incremental borrowing rate to determine the present value o
f
111

lease liabilities. In determining its incremental borrowing rate, the Company reviewed the terms of its leases, its senior secured credit facility, swap rates, and other factors.
The weighted-average remaining lease term and weighted-average discount rate used to calculate the present value of lease liabilities are as follows:
   
December 31,
 
   
2020
  
2019
 
Weighted-average remaining lease term:
         
Operating leases
   8.3 years   8.3 years 
Finance leases
   3.1 years   3.2 years 
Weighted-average discount rate:
         
Operating leases
   5.5  5.6
Finance leases
   5.1  5.4
Supplemental cash flow information related to leases is as follows:
   
Year Ended December 31,
   
      2020      
  
      2019      
   
(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
      
Operating cash flows for operating leases
   $50.3   $45.9
Operating cash flows for finance lease
s
    0—      0—  
Financing cash flows for finance leases
    0.5    0.4
Right-of-use
assets obtained in exchange for new lease liabilities:
      
Operating leases
    74.2    55.2
Finance leases
    0.1    0.6
5. Long-Term Debt
Long-term debt consists of the following:
   
December 31,
 
   
2020
   
2019
 
   
(in millions)
 
Borrowings under senior secured credit facility, carrying value
  $976.5   $965.3 
2.625% convertible senior notes due 2024, carrying value of liability component
   460.6    437.4 
7.875% senior notes due 2025, carrying value
   592.9    —   
7.250% senior notes due 2026, carrying value
   395.9    395.3 
Other
   2.5    5.0 
           
Total
   2,428.4    1,803.0 
Less: current portio
n
   22.9    24.1 
           
Long-term portion
  $2,405.5   $1,778.9 
           
Senior Secured Credit Facility.

Facility

On February 15, 2017, the Company entered into a new $1,450.0 million senior secured credit facility, or the 2017 Credit Facility, consisting of a $1,300.0 million term loan B, or the 2017 Term Loan B, and a $150.0 million revolving credit facility, or the 2017 Revolving Credit Facility, with a syndicate of financial institutions as lenders, or Lenders.lenders. The 2017 Revolving Credit Facility matureswas to mature on February 15, 2022 and the
112

2017 Term Loan maturesB was to mature on February 15, 2023. However, ifThe 2017 Credit Facility was amended, effective March 16, 2018, to make certain technical amendments in connection with the outstanding principal onoffering of the 2024 Convertible Notes, as defined below, exceeds $250.0 millionbelow. The Company terminated the 2017 Credit Facility on August 16, 2018 and the Company exceeds certain leverage ratios on February 14, 2019,$1,178.1 million outstanding was repaid in full. Prior to its termination, the Revolving Credit Facility will mature on such date. In addition, if the outstanding principal on the Convertible Notes, as defined below, exceeds $250.0 million and the Company exceeds certain leverage ratios on May 16, 2019, the2017 Term Loan will mature on such date. The Credit Facility is secured by certain assets of Herbalife Ltd. and certain of its subsidiaries.


The Term Loan was issued to the Lenders at a 2% discount, or $26.0 million. In connection with the Credit Facility, the Company also repaid the $410.0 million outstanding balance on its Prior Revolving Credit Facility. The Company incurred approximately $22.6 million of debt issuance costs in connection with the Credit Facility. The debt issuance costs and the discount are recorded on the Company’s consolidated balance sheet and are being amortized over the life of the Credit Facility using the effective interest method.

Borrowings under the Term Loan bearB most recently bore interest at either the eurocurrency rate plus a margin of 5.50% or the base rate plus a margin of 4.50%. Prior to August 15,, and the 2017 borrowings under the Revolving Credit Facility most recently bore interest at the eurocurrency rate plus a margin of 4.75% or the base rate plus a margin of 3.75%. After August 15, 2017, borrowings under the Revolving Credit Facility, depending on Herbalife’s consolidated leverage ratio, bear interest at either the eurocurrency rate plus a margin of either 4.50% or 4.75% or the base rate plus a margin of either 3.50% or 3.75%, based on the Company’s consolidated leverage ratio. The eurocurrency rate was based on adjusted LIBOR and was subject to a floor of 0.75%. The base rate representsrepresented the highest of the Federal Funds Rate plus 0.50%,

one-month
adjusted LIBOR plus 1.00%, and the prime rate set by Credit Suisse, and iswas subject to a floor of 1.75%.
The 2017 Term Loan B was issued to the lenders at a 2% discount, or $26.0 million. The Company incurred approximately $22.6 million of debt issuance costs in connection with the 2017 Credit Facility. The debt issuance costs and the discount were recorded on the Company’s consolidated balance sheet and were being amortized over the life of the 2017 Credit Facility using the effective-interest method. The Company wrote off all remaining unamortized debt issuance costs and discount related to the 2017 Credit Facility upon its termination, which is included in the loss on extinguishment as described below.
On August 16, 2018, the Company entered into a $1.25 billion senior secured credit facility, or the 2018 Credit Facility, consisting of a $250.0 million term loan A, or the 2018 Term Loan A, a $750.0 million term loan B, or the 2018 Term Loan B, and a $250.0 million revolving credit facility, or the 2018 Revolving Credit Facility, with a syndicate of financial institutions as lenders. Prior to the amendment described below, the 2018 Term Loan A and 2018 Revolving Credit Facility both were to mature on August 16, 2023. The 2018 Term Loan B matures upon the earlier of: (i) August 18, 2025; or (ii) December 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $350.0 million and the Company exceeds certain leverage ratios as of that date. All obligations under the 2018 Credit Facility are unconditionally guaranteed by certain direct and indirect wholly-owned subsidiaries of Herbalife Nutrition Ltd. and secured by the equity interests of certain of Herbalife Nutrition Ltd.’s subsidiaries and substantially all of the assets of the domestic loan parties. Also on August 16, 2018, the Company issued $400 million aggregate principal amount of senior unsecured notes, or the 2026 Notes, as described below, and used the proceeds from the 2018 Credit Facility and the 2026 Notes to repay in full the $1,178.1 million outstanding under the 2017 Credit Facility. For accounting purposes, pursuant to ASC 470, these transactions were accounted for as an extinguishment of the 2017 Credit Facility. The Company recognized a loss on extinguishment of $35.4 million as a result, which was recorded in other expense (income), net within the Company’s consolidated statement of income during the year ended December 31, 2018.
The 2018 Term Loan B was issued to the lenders at a 0.25% discount, or $1.9 million. The Company incurred approximately $11.7 million of debt issuance costs in connection with the 2018 Credit Facility. The discount and debt issuance costs are recorded on the Company’s consolidated balance sheet and are being amortized over the life of the 2018 Credit Facility using the effective-interest method.
On December 12, 2019, the Company amended the 2018 Credit Facility which, among other things, reduced the interest rate for borrowings under the 2018 Term Loan B from either the eurocurrency rate plus a margin of 3.25% or the base rate plus a margin of 2.25% to either the eurocurrency rate plus a margin of 2.75% or the base rate plus a margin of 1.75%. The Company incurred approximately $1.2 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense within the Company’s consolidated statement of income during the year ended December 31, 2019.
On March 19, 2020, the Company amended the 2018 Credit Facility which, among other things, extended the maturity of both the 2018 Term Loan A and 2018 Revolving Credit Facility to the earlier of: (i) March 19, 2025 or (ii) September 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below,
113

exceeds $350.0 million and the Company exceeds certain leverage ratios as of that date; increased borrowings under the 2018 Term Loan A from $234.4 million to a total of $264.8 million; increased the total available borrowing capacity under 2018 Revolving Credit Facility from $250.0 million to $282.5 million; and reduced the interest rate for borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility from either the eurocurrency rate plus a margin of 3.00% or the base rate plus a margin of 2.00% to either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. The Company incurred approximately $1.6 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the $1.6 million of debt issuance costs, approximately $1.1 million was recorded on the Company’s consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately $0.5 million was recognized in interest expense within the Company’s consolidated statement of income during the year ended December 31, 2020.
Under the 2018 Credit Facility, borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility bear interest at either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. Borrowings under the 2018 Term Loan B bear interest at either the eurocurrency rate plus a margin of 2.75% or the base rate plus a margin of 1.75%. The eurocurrency rate is based on adjusted LIBOR and is subject to a floor of 0.75%0.00%. The base rate represents the highest of the Federal Funds Rate plus 0.50%,
one-month
adjusted LIBOR plus 1.00%, and the prime rate quoted by The Wall Street Journal, and is subject to a floor of 1.00%. The Company is required to pay a commitment fee on the 2018 Revolving Credit Facility of 0.50%0.35% per annum on the undrawn portion of the 2018 Revolving Credit Facility. Interest is due at least quarterly on amounts outstanding onunder the 2018 Credit Facility.

The 2018 Credit Facility requires the Company to comply with a leverage ratio. The 2018 Credit Facility also contains affirmative and negative covenants customary for financings of this type, including, among other things, limitations or prohibitions on repurchasing common shares, declaring and paying dividends and other distributions, redeeming and repurchasing certain other indebtedness, loans and investments, additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2018 Credit Facility contains customary events of default and covenants, including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, pay dividends, repurchase its common shares, merge or consolidate and enter into certain transactions with affiliates. The Company is also required to maintain a minimum balance of $200.0 million of consolidated cash and cash equivalents.default. As of December 31, 20172020 and December 31, 2016,2019, the Company was in compliance with its debt covenants under the 2018 Credit Facility and the Prior Credit Facility, respectively.

Facility.

The 2018 Term Loan isA and 2018 Term Loan B are payable in consecutive quarterly installments each in an aggregate principal amount of $24.4 million which began on June 30, 2017.December 31, 2018. In addition, beginning in 2020, the Company may be required to make mandatory prepayments towards the 2018 Term Loan B based on the Company’s consolidated leverage ratio and annual excess cash flows as defined under the terms of the 2018 Credit Facility. The Company is also permitted to make voluntary prepayments. Amounts outstanding under the 2018 Term Loan A may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. Under the amended 2018 Credit Facility, amounts outstanding under the 2018 Term Loan B may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. These prepayments, if any, will be applied against remaining quarterly installments owed under the 2018 Term Loan A and 2018 Term Loan B in order of maturity with the remaining principal due upon maturity. The Company currently does not expect to make a mandatory prepayment towardmaturity, unless directed otherwise by the Term Loan basedCompany. Based on its 2017the 2020 consolidated leverage ratio and excess cash flow calculation, both as defined under the terms of the 2018 Credit Facility.

OnFacility, the Company will not be required to make a mandatory prepayment in 2021 toward the 2018 Term Loan B.

As of December 31, 20172020 and December 31, 2016,2019, the weighted averageweighted-average interest rate for borrowings under the Credit Facility and the Prior2018 Credit Facility was 6.79%3.39% and 4.29%5.52%, respectively.

During the year ended December 31, 2017,2020, the Company borrowed an aggregate amount of $30.4 million under the 2018 Credit Facility and repaid a total amount of $20.7 million on amounts outstanding under the 2018 Credit Facility. During the year ended December 31, 2019, the Company repaid a total amount of $483.1$20.0 million on amounts outstanding under the 2018 Credit Facility. During the year ended December 31, 2018,
114

the Company borrowed an aggregate amount of $1,000.0 million under the 2018 Credit Facility and repaid a total amount of $1,231.9 million, including $410.0$5.0 million on amounts outstanding under the 2018 Credit Facility and $1,226.9 million to repay in full amounts outstanding onunder the Prior Revolving2017 Credit Facility. During the year ended December 31, 2016, the Company borrowed an aggregate amount of $200.0 million and paid a total amount of $429.7 million under the Prior Credit Facility. As of December 31, 2017,2020 and 2019, the U.S. dollar amount outstanding under the Term Loan2018 Credit Facility was $1,226.9 million. There were no borrowings$984.7 million and $975.0 million, respectively. Of the $984.7 million outstanding onunder the Revolving2018 Credit Facility as of December 31, 2017. As2020, $251.6 million was outstanding under the 2018 Term Loan A and $733.1 million was outstanding under the 2018 Term Loan B. Of the $975.0 million outstanding under the 2018 Credit Facility as of December 31, 2016, the U.S. dollar amount2019, $234.4 million was outstanding under the Prior2018 Term Loan A and $740.6 million was outstanding under the 2018 Term Loan B. There were 0 borrowings outstanding under the 2018 Revolving Credit Facility was $410.0 million.as of both December 31, 2020 and 2019. There were no0 outstanding foreign currency borrowings under the 2018 Credit Facility as of both December 31, 20172020 and 2016 under the Credit Facility and the Prior Credit Facility, respectively.

2019.

During the year ended December 31, 2017,2020, the Company recognized $82.2$37.2 million of interest expense relating to the Term Loan,2018 Credit Facility, which included $4.2$0.3 million relating to
non-cash
interest expense relating to the debt discount and $2.8$1.8 million relating to amortization of debt issuance costs.

During the year ended December 31, 2019, the Company recognized $58.9 million of interest expense relating to the 2018 Credit Facility, which included $0.2 million relating to

non-cash
interest expense relating to the debt discount and $1.7 million relating to amortization of debt issuance costs. During the year ended December 31, 2018, the Company recognized $83.6 million of interest expense relating to the 2018 Credit Facility and 2017 Credit Facility, which included $2.9 million relating to
non-cash
interest expense relating to the debt discount and $3.2 million relating to amortization of debt issuance costs.
The fair value of the outstanding borrowings on the 2018 Term Loan A is determined by utilizing
over-the-counter
market quotes for similar instruments, which are considered Level 2 inputs as described in Note 1
3
,
Fair Value Measurements
. As of December 31, 2020 and 2019, the carrying value of the 2018 Term Loan A was $250.5 million and $233.2 million, respectively, and the fair value was approximately $251.9 million and $235.7 million, respectively. The fair value of the outstanding borrowings under the 2018 Term Loan B are determined by utilizing
over-the-counter
market quotes, which are considered Level 2 inputs as described in Note 13,
Fair Value Measurements
. As of December 31, 2017,2020 and 2019, the carrying amount of the 2018 Term Loan B was $1,190.2$726.0 million and $732.1 million, respectively, and the fair value was approximately $1,226.1 million. There were no amounts outstanding on the Revolving Credit Facility as of December 31, 2017. The fair value of the outstanding borrowings on the Company’s Prior Revolving Credit Facility approximated its carrying value as of December 31, 2016 due to its variable interest rate which reprices frequently$734.0 million and which represents floating market rates. The fair value of the outstanding borrowings on the Prior Revolving Credit Facility was determined by utilizing Level 2 inputs as described in Note 13, Fair Value Measurements, such as observable market interest rates and yield curves.

$744.8 million, respectively.

Convertible Senior Notes

During due 2019

In February 2014, the Company initially issued $1 billion aggregate principal amount of convertible senior notes, or the 2019 Convertible Notes, in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company granted an option to the initial purchasers to purchase up to an additional $150 million aggregate principal amount of 2019 Convertible Notes which was subsequently exercised in full duringin February 2014, resulting in a total issuance of $1.15 billion aggregate principal amount of 2019 Convertible Notes. The 2019 Convertible Notes arewere senior unsecured obligations which rankranked effectively subordinate to any of the Company’s existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2019 Convertible Notes paypaid interest at a rate of 2.00% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2014. TheUnless earlier repurchased or converted, the 2019 Convertible Notes maturematured on August 15, 2019, unless earlier repurchased or converted.2019. The Company maycould not redeem the 2019 Convertible Notes prior to their stated maturity date. Holders of the Convertible Notes may convert their notes at their option under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending March 31, 2014, if the last reported sale price of the Company’s common shares for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price for the Convertible Notes on each applicable trading day; (ii) during the five business-day period immediately after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of the Company’s common shares and the conversion rate for the Convertible Notes for each such day; or (iii) upon the occurrence of specified corporate events. On and after May 15, 2019, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2019 Convertible Notes willwere to be settled in cash and, if applicable, the Company’s common shares, based on the applicable conversion rate at such time. The 2019 Convertible Notes had an initial conversion rate of 11.590823.1816 common shares per $1,000 principal amount of the 2019 Convertible Notes, (which is equal toor an initial conversion price of approximately $86.28$43.14 per common share).

share.

115

The Company incurred approximately $26.6 million of issuance costs during the first quarter of 2014 relating to the issuance of the 2019 Convertible Notes. Of the $26.6 million issuance costs incurred, $21.5 million and $5.1 million were recorded as debt issuance costs and additional
paid-in
capital, respectively, in proportion to the allocation of the proceeds of the 2019 Convertible Notes. The $21.5 million of debt issuance costcosts recorded on the Company’s consolidated balance sheet is beingwere amortized over the contractual term of the 2019 Convertible Notes using the effective interesteffective-interest method.

During

In February 2014, the $1.15 billion proceeds received fromaggregate principal amount of the issuance of the2019 Convertible Notes were initially allocated between long-term debt, or liability component, and additional paid-in-capital,
paid-in
capital, or equity component, within the Company’s consolidated balance sheet at $930.9 million and $219.1 million, respectively. The liability component was measured using the nonconvertible debt interest rate. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the 2019 Convertible Notes as a whole. Since the Company was required to settle these 2019 Convertible Notes at face value at or prior to maturity, this liability component was accreted up to its face value resulting in additional
non-cash
interest expense being recognized within the Company’s consolidated statements of income while the 2019 Convertible Notes remained outstanding. The effective-interest rate on the 2019 Convertible Notes was approximately 6.2% per annum. The equity component was not to be remeasured as long as it continued to meet the conditions for equity classification.
In March 2018, the Company issued $550 million aggregate principal amount of new convertible senior notes due 2024, or 2024 Convertible Notes as described below, and subsequently used the proceeds, along with cash on hand, to repurchase $475.0 million of its existing 2019 Convertible Notes from a limited number of holders in privately negotiated transactions for an aggregate purchase price of $583.5 million, which included $1.0 million of accrued interest. For accounting purposes, pursuant to ASC 470, these transactions were accounted for as an extinguishment of 2019 Convertible Notes and an issuance of new 2024 Convertible Notes. The Company allocated the purchase price between the fair value of the liability component and the equity component of the 2019 Convertible Notes at $459.4 million and $123.0 million, respectively. As a result, the Company recognized $446.4 million as a reduction to long-term debt representing the carrying value of the liability component and $123.0 million as a reduction to additional
paid-in
capital representing the equity component of the repurchased 2019 Convertible Notes. The $13.1 million difference between the fair value and carrying value of the liability component of the repurchased 2019 Convertible Notes was recognized as a loss on extinguishment of debt as a result of the transaction and was recorded in other expense (income), net within the Company’s consolidated statement of income during the year ended December 31, 2018. The accounting impact of the 2024 Convertible Notes is described in further detail below.
On August 15, 2019, the 2019 Convertible Notes matured and the Company repaid the $675.0 million outstanding principal in cash, as well as $6.7 million of accrued interest.
During the years ended December 31, 2019 and 2018, the Company recognized $27.0 million and $48.5 million, respectively, of interest expense relating to the 2019 Convertible Notes, which included $17.0 million and $29.8 million, respectively, relating to
non-cash
interest expense relating to the debt discount and $1.7 million and $2.9 million, respectively, relating to amortization of debt issuance costs.
In conjunction with the issuance of the 2019 Convertible Notes, during February 2014, the Company paid approximately $685.8 million to enter into prepaid forward share repurchase transactions, or the Forward Transactions, with certain financial institutions, and paid approximately $123.8 million to enter into capped call transactions with respect to its common shares, or the Capped Call Transactions, with certain financial institutions. Subsequently, in conjunction with the repurchase of a portion of the 2019 Convertible Notes, during March 2018, the Company entered into agreements with the option counterparties to the Capped Call Transactions to terminate a portion of such existing transactions. See Note 8,
Shareholders’ Deficit
, for additional discussion on the Forward Transactions and Capped Call Transactions entered into in conjunction with the issuance of these 2019 Convertible Notes.
116

Convertible Senior Notes due 2024
In March 2018, the Company issued $550 million aggregate principal amount of convertible senior notes, or the 2024 Convertible Notes, in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended. The 2024 Convertible Notes are senior unsecured obligations which rank effectively subordinate to any of the Company’s existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2024 Convertible Notes pay interest at a rate of 2.625% per annum payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2018. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature on March 15, 2024. Holders of the 2024 Convertible Notes may convert their notes at their option under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending June 30, 2018, if the last reported sale price of the Company’s common shares for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price for the 2024 Convertible Notes on each applicable trading day; (ii) during the five
business-day
period immediately after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of 2024 Convertible Notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of the Company’s common shares and the conversion rate for the 2024 Convertible Notes for each such day; (iii) if the Company calls the 2024 Convertible Notes for redemption; or (iv) upon the occurrence of specified corporate events. On and after December 15, 2023, holders may convert their 2024 Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2024 Convertible Notes will be settled, at the Company’s election, in cash, the Company’s common shares, or a combination thereof, based on the applicable conversion rate at such time. The 2024 Convertible Notes had an initial conversion rate of 16.0056 common shares per $1,000 principal amount of the 2024 Convertible Notes, or an initial conversion price of approximately $62.48 per common share. The conversion rate is subject to adjustment upon the occurrence of certain events and was 16.0352 common shares per $1,000 principal amount of the 2024 Convertible Notes, or a conversion price of approximately $62.36 per common share, as of December 31, 2020.
The Company incurred approximately $12.9 million of issuance costs during the first quarter of 2018 relating to the issuance of the 2024 Convertible Notes. Of the $12.9 million issuance costs incurred, $9.6 million and $3.3 million were recorded as debt issuance costs and additional
paid-in
capital, respectively, in proportion to the allocation of the proceeds of the 2024 Convertible Notes. The $9.6 million of debt issuance costs, which was recorded as an additional debt discount on the Company’s consolidated balance sheet, are being amortized over the contractual term of the 2024 Convertible Notes using the effective-interest method.
In March 2018, the $550 million aggregate principal amount of the 2024 Convertible Notes were initially allocated between long-term debt, or liability component, and additional
paid-in-capital,
or equity component, within the Company’s consolidated balance sheet at $410.1 million and $139.9 million, respectively. The liability component was measured using the nonconvertible debt interest rate. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the 2024 Convertible Notes as a whole. Since the Company must still settle these 2024 Convertible Notes at face value at or prior to maturity, this liability component will be accreted up to its face value resulting in additional
non-cash
interest expense being recognized within the Company’s consolidated statements of income while the 2024 Convertible Notes remain outstanding. The effective interesteffective-interest rate on the 2024 Convertible Notes is approximately 6.2%8.4% per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

As of December 31, 2017,2020, the outstanding principal on the 2024 Convertible Notes was $1.15 billion,$550.0 million, the unamortized debt discount and debt issuance cost was $80.0costs were $89.4 million, and the carrying amount of the liability component was $1,070.0$460.6 million, which was recorded to long-term debt within the Company’s consolidated
117

balance sheet. As of December 31, 2019, the outstanding principal on the 2024 Convertible Notes was $550.0 million, the unamortized debt discount and debt issuance costs were $112.6 million, and the carrying amount of the liability component was $437.4 million, which was recorded to long-term debt within the Company’s consolidated balance sheetsheet. The fair value of the liability component relating to the 2024 Convertible Notes was approximately $541.8 million and $508.6 million as reflectedof December 31, 2020 and 2019, respectively.
During the years ended December 31, 2020, 2019, and 2018, the Company recognized $37.7 million, $35.8 million, and $26.6 million, respectively, of interest expense relating to the 2024 Convertible Notes, which included $21.8 million, $20.0 million, and $14.5 million, respectively, relating to
non-cash
interest expense relating to the debt discount and $1.5 million, $1.4 million, and $1.0 million, respectively, relating to amortization of debt issuance costs.
Senior Notes due 2025
In May 2020, the Company issued $600 million aggregate principal amount of senior notes, or the 2025 Notes, in a private offering in the table above within this Note. United States to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended, and outside the United States pursuant to Regulation S under the Securities Act of 1933, as amended. The 2025 Notes are senior unsecured obligations which rank effectively subordinate to any of the Company’s existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2025 Notes pay interest at a rate of 7.875% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes mature on September 1, 2025.
At any time prior to September 1, 2022, the Company may redeem all or part of the 2025 Notes at a redemption price equal to 100% of their principal amount, plus a “make whole” premium as of the redemption date, and accrued and unpaid interest to the redemption date. In addition, at any time prior to September 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2025 Notes with the proceeds of one or more equity offerings, at a redemption price equal to 107.875%, plus accrued and unpaid interest. Furthermore, at any time on or after September 1, 2022, the Company may redeem all or part of the 2025 Notes at the following redemption prices, expressed as percentages of principal amount, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve-month period beginning on September 1 of the years indicated below:
   
Percentage
 
2022
   103.938
2023
   101.969
2024 and thereafter
   100.000
The 2025 Notes contain customary negative covenants, including, among other things, limitations or prohibitions on restricted payments, incurrence of additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2025 Notes contain customary events of default.
The Company incurred approximately $7.9 million of issuance costs during the second quarter of 2020 relating to the issuance of the 2025 Notes. The $7.9 million of debt issuance costs, which was recorded as a debt discount on the Company’s consolidated balance sheet, are being amortized over the contractual term of the 2025 Notes using the effective-interest method.
As of December 31, 2016,2020, the outstanding principal on the Convertible2025 Notes was $1.15 billion,$600.0 million, the unamortized debt discount and debt issuance costs was $125.2were $7.1 million, and the carrying amount of the liability component was $1,024.8$592.9 million, which was recorded to long-term debt within the Company’s consolidated balance sheet as reflected in the table above within this Note.sheet. The fair value of the liability component relating to the Convertible2025 Notes was approximately $1,066.0 million and $961.3$656.3 million as of December 31, 20172020 and 2016, respectively. was determined by utilizing over-the-counter market quotes and yield curves, which are considered Level 2 inputs as defined in Note 1
3
,
Fair Value Measurements
.
118

During the year ended December 31, 2020, the Company recognized $28.5 million of interest expense relating to the 2025 Notes, which included $0.7 million relating to amortization of debt issuance costs.
Senior Notes due 2026
In August 2018, the Company issued $400 million aggregate principal amount of senior notes, or the 2026 Notes, in a private offering in the United States to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended, and outside the United States pursuant to Regulation S under the Securities Act of 1933, as amended. The 2026 Notes are senior unsecured obligations which rank effectively subordinate to any of the Company’s existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2026 Notes pay interest at a rate of 7.250% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2019. The 2026 Notes mature on August 15, 2026.
At any time prior to August 15, 2021, the Company may redeem all or part of the 2026 Notes at a redemption price equal to 100% of their principal amount, plus a “make whole” premium as of the redemption date, and accrued and unpaid interest to the redemption date. In addition, at any time prior to August 15, 2021, the Company may redeem up to 40% of the aggregate principal amount of the 2026 Notes with the proceeds of one or more equity offerings, at a redemption price equal to 107.250%, plus accrued and unpaid interest. Furthermore, at any time on or after August 15, 2021, the Company may redeem all or part of the 2026 Notes at the following redemption prices, expressed as percentages of principal amount, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve-month period beginning on August 15 of the years indicated below:
   
Percentage
 
2021
   103.625
2022
   101.813
2023 and thereafter
   100.000
The 2026 Notes contain customary negative covenants, including, among other things, limitations or prohibitions on restricted payments, incurrence of additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2026 Notes contain customary events of default.
The Company incurred approximately $5.4 million of issuance costs during the third quarter of 2018 relating to the issuance of the 2026 Notes. The $5.4 million of debt issuance costs, which was recorded as a debt discount on the Company’s consolidated balance sheet, are being amortized over the contractual term of the 2026 Notes using the effective-interest method.
As of December 31, 20172020, the outstanding principal on the 2026 Notes was $400.0 million, the unamortized debt issuance costs were $4.1 million, and 2016,the carrying amount was $395.9 million, which was recorded to long-term debt within the Company’s consolidated balance sheet. As of December 31, 2019, the outstanding principal on the 2026 Notes was $400.0 million, the unamortized debt issuance costs were $4.7 million, and the carrying amount was $395.3 million, which was recorded to long-term debt within the Company’s consolidated balance sheet. The fair value of the 2026 Notes was approximately $425.0 million and $424.1 million as of December 31, 2020 and 2019, respectively, and was determined by utilizing over-the-counter market quotes and yield curves, which are considered Level 2 inputs as defined in Note 13,
Fair Value Measurements
.
During the years ended December 31, 2020, 2019, and 2018, the Company recognized $29.6 million, $29.5 million, and $11.1 million, respectively, of interest expense relating to the 2026 Notes, which included $0.6 million, $0.5 million, and $0.2 million, respectively, relating to amortization of debt issuance costs.
119

Valuation of 2019 Convertible Notes and 2024 Convertible Notes – Level 2 and Level 3 Inputs
In order to determine the initial value of the 2019 Convertible Notes and the 2024 Convertible Notes, the Company determined the fair value of the liability component of the 2019 Convertible Notes and the 2024 Convertible Notes using two valuation methods. The Company reviewed market data that was available for publicly traded, senior, unsecured nonconvertible corporate bonds issued by companies with similar credit ratings. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market yields and credit standing to develop the straight debt yield estimate. The Company also used a lattice model, which included inputs such as stock price, the Convertible Note trading price, volatility and dividend yield to estimate the straight debt yield. The Company combined the results of the two valuation methods to determine the fair value of the liability component of the 2019 Convertible Notes and the 2024 Convertible Notes. Most of these inputs are primarily considered Level 2 and Level 3 inputs. ThisThe Company used similar valuation approach was similar to the approach the Company usedapproaches to determine the initialsubsequent fair value of the liability component of the Convertible Notes on the February 7, 2014 issuance date.


In conjunction with the issuance of the Convertible Notes, during February 2014, the Company paid approximately $685.8 million to enter into prepaid forward share repurchase transactions, or the Forward Transactions, with certain financial institutions,only for disclosure purposes, which includes using a lattice model and paid approximately $123.8 million to enter into capped call transactions with respect(1) reviewing market data relating to its common shares,2025 Notes and 2026 Notes and comparable yield curves to determine its straight debt yield estimate, or the Capped Call Transactions, with certain financial institutions. See Note 8, Shareholders’ (Deficit) Equity, for additional discussion on the Forward Transactions and Capped Call Transactions entered into in conjunction with the issuance of these Convertible Notes.

During the years ended December 31, 2017, 2016, and 2015, the Company recognized $68.2 million, $65.3 million, and $61.7 million of interest expense(2) reviewing market data relating to the Convertible Notes, respectively, which included $41.2 million, $38.6 million, and $35.7 million relatingpublicly traded, senior, unsecured nonconvertible corporate bonds issued by companies with similar credit ratings in order to non-cash interest expense relating to thedetermine its straight debt discount, respectively, and $4.0 million, $3.8 million, $3.2 million relating to amortization of debt issuance costs, respectively.

yield estimate.

Total Debt

The Company’s total interest expense including the Credit Facility, was $160.8$133.0 million, $99.3$153.0 million, and $100.5$181.0 million, for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, which was recognized within its consolidated statementstatements of income.

As of December 31, 2017,2020, annual scheduled principal payments of debt were as follows (in millions):

follows:

 

 

Principal Payments

 

2018

 

$

102.4

 

2019

 

 

1,250.0

 

2020

 

 

97.9

 

2021

 

 

97.5

 

2022

 

 

97.5

 

Thereafter

 

 

739.4

 

Total

 

$

2,384.7

 

   
Principal
Payments
   
(in millions)
2021
   $22.9 
2022
    27.5 
2023
    27.5 
2024
    584.0 
2025
    1,475.3 
Thereafter
    400.0 
       
Total
   $2,537.2 
       
Certain vendors and government agencies may require letters of credit or similar guaranteeing arrangements to be issued or executed. As of December 31, 2017,2020, the Company had $40.8$41.9 million of issued but undrawn letters of credit or similar arrangements, which included the Mexico Value Added Tax, or VAT, related surety bondsletter of credit described in Note 7,
Contingencies
.

5. Lease Obligations

The Company has warehouse, office, furniture, fixtures and equipment leases, which expire at various dates through 2033. Under the lease agreements, the Company is also obligated to pay property taxes, insurance and maintenance costs.

Certain leases contain renewal options. Future minimum rental commitments for non-cancelable operating leases as of December 31, 2017 were as follows (in millions):

 

 

Operating

 

2018

 

$

51.6

 

2019

 

 

42.7

 

2020

 

 

30.2

 

2021

 

 

17.7

 

2022

 

 

13.6

 

Thereafter

 

 

73.2

 

Total

 

$

229.0

 

The Company recognizes rental expense on a straight-line basis. Rental expense for the years ended December 31, 2017, 2016, and 2015, was $56.2 million, $53.4 million, and $58.0 million, respectively.

There was no material property, plant and equipment under capital leases included in property, plant and equipment on the accompanying consolidated balance sheets as of December 31, 2017 and December 31, 2016.


6. Employee Compensation Plans

In the United States, the Company maintains a profit sharing plan pursuant to Sections 401(a) and (k) of the Internal Revenue Code of 1986, as amended, or the Code. The plan is available to substantially all employees who meet the length of service requirements. The Company’s contribution expense relating to this profit sharing plan was $4.8$6.6 million, $4.8$5.2 million, and $4.3$5.7 million during the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively.

The Company has employees in international countries that are covered by various deferred compensation plans. These plans are administered based upon the legal requirements in the countries in which they are established. The Company’s compensation expenses relating to these plans were $6.4$8.8 million, $5.8$7.6 million, and $5.5$6.6 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively.

120

The Company has non-qualified deferred compensation plans for select groups of management: the Herbalife Management Deferred Compensation Plan and the Herbalife Senior Executive Deferred Compensation Plan. The matching contribution was 3.5% of a participant’s annual base salary in excess of the Qualified Plan annual compensation limit and the amount by which deferrals reduce 401(k) eligible-eligible pay below the IRS limit.

Each participant in either of the non-qualified deferred compensation plans discussed above has, at all times, a fully vested and non-forfeitable interest in each year’s contribution, including interest credited thereto, and in any Company matching contributions, if applicable. In connection with a participant’s election to defer an annual deferral amount, the participant may also elect to receive a short-term payout, equal to the annual deferral amount plus interest. Such amount is payable in five or more years from the first day of the year in which the annual deferral amount is actually deferred.

The total expense for the two non-qualified deferred compensation plans, excluding participant contributions, was $6.7 million, $3.6an expense of $9.5 million and $0.1$9.4 million for the years ended December 31, 2017, 2016,2020 and 2015, respectively.2019, respectively, and a benefit of $2.7 million for the year ended December 31, 2018. The total long-term deferred compensation liability under the two deferred compensation plans was $58.1$72.3 million and $50.0$62.4 million as of December 31, 20172020 and 2016,2019, respectively, and areis included in other non-current liabilities within the Company’s consolidated balance sheets.

The deferred compensation plans are unfunded and their benefits are paid from the general assets of the Company, except that the Company has contributed to a “rabbi trust” whose assets will be used to pay the benefits if the Company remains solvent, but can be reached by the Company’s creditors if the Company becomes insolvent. The value of the assets in the “rabbi trust” was $33.6$43.8 million and $30.6$38.9 million as of December 31, 20172020 and 2016,2019, respectively, and areis included in other assets within the Company’s consolidated balance sheets.

7. Contingencies

The Company is from time to time engaged in routine litigation. The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate by management for these litigation matters when a probable loss estimate can be made.

These

The matters described in this Note may take several years to resolve. While the Company believes it has meritorious defenses, it cannot be sure of their ultimate resolution. Although the Company may reserve amounts for certain matters that the Company believes represent the most likely outcome of the resolution of these related disputes, if the Company is incorrect in its assessment, the Company may have to record additional expenses, when it becomes probable that an increased potential liability is warranted.

Tax Matters

On May 7, 2010, the Company received an assessment from the Mexican Tax Administration Service in an amount equivalent to approximately $58.3 million, translated at the December 31, 2017 spot rate, for various items, the majority of which was VAT allegedly owed on certain of the Company’s products imported into Mexico during the years 2005 and 2006. This assessment is subject to interest and inflationary adjustments. On July 8, 2010, the Company initiated a formal administrative appeal process. On May 13, 2011, the Mexican Tax Administration Service issued a resolution on the Company’s administrative appeal. The resolution nullified the assessment. Since the Mexican Tax Administration Service can further review the tax audit findings and re-issue some or all of the original assessment, the Company commenced litigation in the Tax Court of Mexico in August 2011 to dispute the assertions made by the Mexican Tax Administration Service in the case. The Company received notification on February 6, 2015 that the Tax Court of Mexico nullified substantially all of the assessment. On March 18, 2015, the Mexican Tax Administration Service filed an appeal against the verdict with the Circuit Court. On August 27, 2015, the Circuit Court remanded the case back to the Tax Court of Mexico to reconsider a portion of the procedural decision that was adverse to the Mexican Tax Administration Service. The Company received notification on March 18, 2016 that the Tax Court of Mexico nullified a portion of the assessment and upheld a portion of the


original assessment. On August 25, 2016, the Company filed a further appeal of this decision to the Circuit Court. On April 6, 2017, the Circuit Court issued a verdict with the Company prevailing on some lesser issues and the Tax Administration Service prevailing on the core issue. On May 11, 2017, the Company filed a further appeal to the Supreme Court of Mexico. On June 14, 2017, the Supreme Court of Mexico agreed to hear the appeal. The Company believes that it has meritorious defenses if the assessment is reissued. The Company has not recognized a loss as the Company does not believe a loss is probable.

The Mexican Tax Administration Service commenced audits of the Company’s Mexican subsidiaries for the period from January to September 2007 and on May 10, 2013, the Company received an assessment of approximately $14.9 million, translated at the December 31, 2017 spot rate, related to that period. This assessment is subject to interest and inflationary adjustments. On July 11, 2013, the Company filed an administrative appeal disputing the assessment. On September 22, 2014, the Mexican Tax Administration Service denied the Company’s administrative appeal. The Company commenced litigation in the Tax Court of Mexico in November 2014 to dispute the assertions made by the Mexican Tax Administration Service in the case. On January 16, 2018, the Tax Court of Mexico issued a verdict upholding the assessment issued by the Mexican Tax Administration Service. TheOn April 16, 2018, the Company intends to file a timelyfiled an appeal of the case tothis verdict, and in July 2019, the Circuit Court issued a written verdict upholding the assessment and the judgment of Appeals. Litigationthe Tax Court of Mexico. On August 12, 2019, the Company filed an appeal with the Supreme Court of Mexico. On October 16, 2019, the Supreme Court of Mexico refused to hear the Company’s appeal. On October 21, 2019, the Company filed a petition with the Supreme Court of Mexico, asking them to reconsider their previous decision. On April 29, 2020, the Supreme Court of Mexico declined the Company’s second petition and the
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Table of Contents
adverse verdicts of the lower courts became final. The Company will pay the assessed amount in this case is currently ongoing.due course. The Company previously recognized a loss of $19.0 million in selling, general, and administrative expenses within the Company’s consolidated statement of income during the year ended December 31, 2019 and has a corresponding accrued liability within its consolidated balance sheet as of December 31, 2020. The Company has not recognizedan issued but undrawn letter of credit through a loss as the Company does not believe a loss is probable. The Company issued a surety bond in the amount of $17.6 million, translated at the December 31, 2017 spot rate, through an insurance companybank to guarantee payment of the tax assessment as required, while the Company pursues an appeal of the assessment, and the surety bond remainedletter of credit continued to remain effective as of December 31, 2017.

2020.

The Mexican Tax Administration Service has delayed processing VAT refunds for companies operating in Mexico and the Company believes that the process for its Mexico subsidiary to receive VAT refunds may be delayed. As of December 31, 2017,2020, the Company had $41.2$24.2 million of Mexico VAT relatedVAT-related assets, of which $35.3$18.3 million was within non-currentrecognized in other assets and $5.9 million was withinrecognized in prepaid expenses and other current assets onwithin its consolidated balance sheet. This amount relates to VAT payments made over various periods and the Company believes these amounts are recoverable by refund or they may be applied against certain future tax liabilities. Effective January 1, 2019, a tax reform law changed the rules concerning possible use of VAT assets, specifically providing that, for VAT balances generated after December 31, 2018, those balances could not be offset against taxes other than VAT obligations currently due. The Company has not recognized any losses related to these VAT relatedVAT-related assets as the Company does not
0t
believe a loss is probable.

On March 26, 2015, the Office of the President of Mexico issued a decree relating to the application of VAT to nutritional supplements. The Company continues to believe its application of the VAT law in Mexico is correct. As of December 31, 2017, the Company has not recognized any losses as the Company, based on its current analysis and guidance from its advisors, does not believe a loss is probable. The Company continues to evaluate and monitor its situation as it develops, including whether it will make any changes to its operations in Mexico.

The Company has not recognized a loss with respect to any of these Mexican matters as the Company, based on its analysis and guidance from its advisors, does not believe a loss is probable. Further, the Company is currently unable to reasonably estimate a possible loss or range of loss that could result from an unfavorable outcome if an assessment was re-issued or any additionalreceived tax assessments were to be issued for these or other periods. The Company believes that it has meritorious defenses if an assessment is re-issued or would have meritorious defenses if any additional assessment is issued.

As previously disclosed, the Mexican Tax Administration Service has requested information related to the Company’s 2010 year. This information has been provided and the Tax Administration Service has now completed its income tax audit related to the 2010 year. The audit resulted in an insignificant assessment which the Company has paid. The Company does not plan to appeal the case.

The Company received a tax assessment in September 2009multiple years from the Federal Revenue Office of Brazil in an amount equivalent to approximately $2.1 million, translated at the December 31, 2017 spot rate, related to withholding/contributions based on payments to the Company’s Members during 2004. On December 28, 2010, the Company appealed this tax assessment to the Administrative CouncilMembers. The aggregate combined amount of Tax Appeals (2nd level administrative appeal). The Company believes it has meritorious defenses and it has not recognized a loss as the Company does not believe a lossall these assessments is probable. On March 6, 2014, the Company was notified of a similar audit of the 2011 year. In January 2016, the Company received a tax assessment for an amount equivalent to approximately $5.3$10.6 million, translated at the December 31, 20172020 spot rate, related to contributions based on payments to the Company’s Members during 2011.rate. The Company filed a first levelis currently litigating these assessments at the tax administrative appeal against most of the assessment on February 23, 2016, which was subsequently denied. On March 13, 2017, the Company appealed this tax assessment to the Administrative Council of Tax Appeals (2nd level administrative appeal).level. The Company has not accrued a loss for the majority of the assessmentassessments because the Company does not believe a loss is probable. The Company is currently unable to reasonably estimate the amount of the loss that may result from an unfavorable outcome if additional assessments for other periods were to be issued.


The Company’s Brazilian subsidiary pays ICMS-ST taxes on its product purchases, similar to VAT. As of December 31, 2017, the Company had $11.7 million of Brazil ICMS-ST, of which $4.4 million was within non-current other assets and $7.3 million was within prepaid expenses and other current assets on its consolidated balance sheet. The Company believes it will be able to utilize or recover these ICMS-ST credits in the future.

The Company is under examination in several Brazilian states related to ICMS and ICMS-ST taxation. Some of these examinations have resulted in assessments for underpaid tax that the Company has appealed. The State of SaoSão Paulo has audited the Company for the 2013 and 2014 tax years. During July 2016, for the State of SaoSão Paulo, the Company received an assessment in the aggregate amount of approximately $48.5$31.0 million, translated at the December 31, 20172020 spot rate, relating to various ICMS issues for its 2013 tax year. In August 2016, the Company filed a first levelfirst-level administrative appeal which was denied in February 2017. The Company filed a further appeal on March 9, 2017. On March 20, 2018, the Court held a hearing and a verdict was issued in June 2019, remanding the case back to the first-level administrative court. During August 2017, for the stateState of SaoSão Paulo, the Company received an assessment in the aggregate amount of approximately $18.0$11.5 million, translated at the December 31, 20172020 spot rate, relating to various ICMS issues for its 2014 tax year. In September 2017, the Company filed a first levelfirst-level administrative appeal for the 2014 tax year. The first-level administrative appeal was denied. The Company has not recognizedfiled an appeal at the second-level administrative court in December 2018 and a loss asverdict was issued in April 2019, remanding the case back to the first-level administrative court. During September 2018, for the State of Rio de Janeiro, the Company does not believereceived an assessment in the aggregate amount of approximately $6.8 million, translated at the December 31, 2020 spot rate, relating to various ICMS-ST issues for its 2016 and 2017 tax years. On November 8, 2018, the Company filed a loss is probable.first-level administrative appeal, which was subsequently denied. On April 5, 2019, the Company appealed this tax assessment to the Administrative Council of Tax Appeals (second-level administrative appeal). The Company has also received other ICMS tax assessments in Brazil. During the fourth quarter of 2015, the Company filed appeals with state judicial courts against three of the assessments. The Company had issued surety bonds in the aggregate amount of $13.1$9.7 million, translated at the December 31, 20172020 spot rate, to guarantee payment of some of the tax assessments as required while the Company pursues the appeals. In addition, the Company has received several ICMS tax assessments in the aggregate amount of $7.3$5.6 million, translated at the December 31, 20172020 spot rate, from several other Brazilian states where surety bonds have not been issued. Litigation in all these cases is currently
ongoing. The Company has also received inquiries from the Brazilian tax authorities relating to
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various tax matters. The Company has not recognized a loss relating to any of these cases, assessments, and matters as the Company does not believe a loss is probable.

The Company
has received various tax assessments in multiple statesjurisdictions in India for multiple years from the Indian VAT and Service Tax authorities in an amount equivalent to approximately $8.3$
15.4
 million, translated at the December 
31 2017
,
2020
spot rate. These assessments are for underpaid VAT.VAT and the ability to claim input Service Tax credits. The Company is litigating these cases at the tax administrative level and the tax tribunal levels as it believes it has meritorious defenses. The Company has not recognized a loss as it does not believe a loss is probable.

In addition, the Company is under an Indian income tax and transfer pricing audit for the fiscal year ended March 

31
,
2017
. While the income tax audit is continuing, the Company has received a transfer pricing assessment of approximately $
13.5
 million, translated at the December 
31
,
2020
spot rate. This assessment is subject to interest and penalties
adjustments. The Company believes that it has meritorious defenses and has appropriately not accrued any amounts relating to this matter.
The Korea Customs Service audited the importation activities of Herbalife Korea for the period January 2011 through May 2013. The total assessment for the audit period is $33.2 $32.6 
million, translated at the December 31, 20172020 spot rate. The Company has paid the assessment and has recognized these payments withinin other assets onwithin its consolidated balance sheet.sheet as of December 31, 2020. The Company lodged a first levelfirst-level administrative appeal, which was denied on October 21, 2016. On January 31, 2017, the Company filed a further appeal to the National Tax Tribunal of Korea. In November 2018, the Company received an unfavorable decision from the National Tax Tribunal of Korea. In February 2019, the Company submitted an appeal to the Seoul Administrative Court. On February 17, 2021, the Seoul Administrative Court verbally announced a verdict in favor of the Company. The Company is awaiting the formal written verdict from the court. The Korea Customs Service audited the importation activities of Herbalife Korea for the period May 2013 through December 2013. The total assessment for the audit period
 is $10.7 million, translated at the December 31, 2020 spot rate. The Company has paid the assessment and has recognized this payment in other assets within its consolidated balance sheet as of December 31, 2020. In July 2019, the Company filed an appeal to the National Tax Tribunal of Korea. The Korea Customs Service audited the importation activities of Herbalife Korea for the period January 2014 through December 2014. The total assessment for the audit period is $16.5 million, translated at the December 31, 2020 spot rate. The Company paid the assessment in September 2020 and has recognized this payment in other assets within its consolidated balance sheet as of December 31, 2020. In December 2020, the Company filed an appeal to the National Tax Tribunal of Korea. The Company disagrees with the assertions made in the assessments, as well as the calculation methodology used in the assessments. The Company has not recognized a loss as the Company does not believe a loss is probable.

During the course of 2016, the Company received various questions from the Greek Social Security Agency and on December 29, 2016, the Greek Social Security Agency issued an assessment of approximately $2.4 million translated at the December 31, 2017 spot rate, with respect to Social Security Contributions on Member earnings for the 2006 year. For Social Security issues, the Statutestatute of Limitationslimitations is open for 2007 and later years in Greece. TheDespite the assessment amount being immaterial, the Company could receive similar assessments covering other years. The Company disputescontinues to litigate the allegations that were raised in the assessment and filed an administrative appeal against the assessment with the Greek Social Security Agency. On November 14, 2017, the Administrative Review Committee of the Greek Social Security Agency notified the Company that it had remanded the case back to the Social Security Agency auditors with an instruction to reconsider the case since the majority of the assessment seemed to be unfounded.assessment. The Company has not recognized a loss as it does not believe a loss is probable.

The Company is currently unable to reasonably estimate the amount of the loss that may result from an unfavorable outcome if additional assessments for other periods were to be issued.

The Italian tax authorities audited the Company for the periods 2014 and 2015. The Company responded to the various points relating to income tax and non-income tax matters raised by the tax authorities. In December 2019, the Company reached an agreement with Italian tax authorities on all issues related to the 2014 audit and paid an immaterial amount during December 2019. In regard to the 2015 audit, the Company reached an agreement with the Italian tax authorities on all issues and paid an immaterial amount during the first quarter of 2020.
The audit is now closed.
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During March 2018, the Chinese Customs Service began an audit of the Company’s Chinese importations initially covering the periods 2015 through 2017 and has subsequently expanded its audit. The Company has responded to the initial questions from the Customs Service and the
audit is ongoing. The Company believes that it has accrued the appropriate amounts, and at the present time the Company is unable to reasonably estimate the amount of any potential loss in excess of the amount already accrued relating to these matters.
U.S. Federal Trade Commission Consent Order

On July 15, 2016, the Company and the Federal Trade Commission, or the FTC, entered into a proposed Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment, or the Consent Order. The Consent Order was lodged with the U.S. District Court for the Central District of California on July 15, 2016 and became effective on July 25, 2016, or the Effective Date. The Consent Order resolved the FTC’s multi-year investigation of the Company.

Pursuant to the Consent Order, under which the Company neither admitted nor denied the FTC’s allegations (except as to the Court having jurisdiction over the matter), the Company made, through its wholly ownedwholly-owned subsidiary Herbalife International of America, Inc., a $200 million payment to the FTC. Additionally, the Company agreedimplemented and continues to implement certain new procedures and enhance certain existing procedures in the U.S., most of which the Company had 10 months from the Effective Date to implement. Among other requirements, the Consent Order requires the Company to categorize all existing and future Members in the U.S. as either “preferred members” – who are simply consumers who only wish to purchase products for their own household use, or “distributors” – who are Members who wish to resell some products or build a sales organization. The Company also agreed to compensate distributors on eligible U.S. sales within their downline organization, which include purchases by preferred members, purchases by a distributor for his or her personal consumption within allowable limits and sales of product by a distributor to his or her customers. The Consent Order also imposes restrictions on a


distributor’s ability to open Nutrition Clubs in the United States. The Consent Order subjects the Company to certain audits by an independent compliance auditor for a period of seven years; imposes requirements on the Company regarding compliance certification and record creation and maintenance; and prohibits the Company, its affiliates and its distributors from making misrepresentations and misleading claims regarding, among other things, income and lavish lifestyles. The FTC and the independent compliance auditor have the right to inspect Company records and request additional compliance reports for purposes of conducting audits pursuant to the Consent Order. In September 2016, the Company and the FTC mutually selected Affiliated Monitors, Inc. to serve as the independent compliance auditor. The Company continues to monitor the impact of the Consent Order and, while the Company currently does not expect the settlement to have a long-term and materially adverse impact on its business and its Member base, the Company’s business and its Member base, particularly in the United States, may be negatively impacted as the Company and the Member base adjust to the changes.impacted. If the Company is unable to comply with the Consent Order then this could result in a material and adverse impact to the Company’s results of operations and financial condition.

Other Matters

As a marketer of foods, dietary and nutritional supplements, and other products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product liability claims. The effects of these claims to date have not been material to the Company. The Company currently maintains product liability insurance with an annual deductible of $12.5 million.

The

As previously disclosed, the SEC and the Department of Justice, haveor DOJ, conducted investigations into the Company’s compliance with the Foreign Corrupt Practices Act, or FCPA, in China. Also, as previously disclosed, the Company conducted its own review and implemented remedial and improvement measures based upon this review, including replacement of certain employees and enhancements of Company policies and procedures in China. The Company cooperated with the SEC and the DOJ and has now reached separate resolutions with each of them. On August 28, 2020, the SEC accepted the Offer of Settlement and issued an administrative order finding that the Company violated the books and records and
internal controls provisions of
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the FCPA. In addition, on
August 28, 2020, the Company and the DOJ separately entered into a court-approved deferred prosecution agreement, or DPA, under which the DOJ deferred criminal prosecution of the Company for a period of three years related to a conspiracy to violate the books and records provisions of the FCPA. Among other things, the Company is required to undertake compliance self-reporting obligations for the
three
-year
terms
of the agreements with the SEC and the DOJ. If the Company remains in compliance with the DPA during its three-year term, the deferred charge against the Company will be dismissed with prejudice. In addition, the
Company paid the SEC and the DOJ aggregate penalties, disgorgement and prejudgment interest of approximately
$123 
million in September 2020, where $83 million and $40 million were recognized in selling,
general, and administrative expenses within the Company’s consolidated statements of income for the years
ended December 31, 2020 and 2019, respectively, related to this matter. Any failure to comply with these agreements, or any resulting further
government action, could result in a material and adverse impact to the Company’s business, financial condition, and operating results. 
As previously disclosed, the SEC had also requested from the Company documents and other information relating to the Company’s anti-corruption compliancedisclosures regarding its marketing plan in China and the Company is conducting its own review. The Company is cooperating with the government and cannot predict the eventual scope, duration, or outcome of these matters at this time.

Since late 2012, a short seller has made and continues to make allegations regardingChina. On September 27, 2019, the Company and its network marketing program. The Company believes these allegations are without merit and has vigorously defended itself against such claims, including proactively reaching outthe SEC entered into a settlement resolving this matter. Pursuant to governmental authorities about whatthe administrative order settling this matter, under which the Company believes is manipulative activity with respectneither admitted nor denied the SEC’s allegations (except as to its securities. Because of these allegations,the SEC’s jurisdiction), the Company agreed to cease and others have receiveddesist from committing or causing any violations and may receive additional regulatoryany future violations of Sections 17(a)(2) and governmental inquiries. For example,17(a)(3) of the Company hasSecurities Act and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and pay a $20 million civil penalty. The $20 million settlement amount, which had previously disclosed inquiries frombeen recorded as an accrued liability within the FTC, SEC and other governmental authorities. In the future, governmental authorities may determine to seek information from the Company and other persons relating to these same or other allegations. If the Company believes any governmental or regulatory inquiry or investigation is or becomes material, it will be disclosed individually. Consistent with its policies, the Company has cooperated and will continue to fully cooperate with any governmental or regulatory inquiries or investigations.

Company’s consolidated balance sheet as of June 30, 2019, was paid in October 2019.

On September 18, 2017, the Company and certain of its subsidiaries and Members were named as defendants in a purported class action lawsuit, titled Rodgers, et al. v Herbalife Ltd., et al. and filed in the U.S. District Court for the Southern District of Florida, which alleges violations of Florida’s Deceptive and Unfair Trade Practices statute and federal Racketeer Influenced and Corrupt Organizations statutes, unjust enrichment, and negligent misrepresentation. On August 23, 2018, the Court issued an order transferring the action to the U.S. District Court for the Central District of California as to 4 of the putative class plaintiffs and ordering the remaining 4 plaintiffs to arbitration, thereby terminating the Company defendants from the Florida action. The plaintiffs seek damages in an unspecified amount. The Company believes the lawsuit is without merit and will vigorously defend itself against the claims in the lawsuit.

In September 2017, one The Company is currently unable to reasonably estimate the amount of the Company’s warehouses located in Mexico sustained flooding which damaged certain inventory stored within the warehouse. The Company maintains insurance coverage with third party carriers on the affected property. As of December 31, 2017, the Company has recorded a loss relating to the damaged inventory and has recognizedthat may result from an equal offsetting receivable for insurance recoveries. This event did not have a material negative impact to its Mexico operations and the Company’s consolidated financial statements.

unfavorable outcome.

8. Shareholders’ (Deficit) Equity

Deficit

The Company had 82.3120.1 million, 93.1137.4 million, and 92.7142.8 million common shares outstanding as of December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. In December 2004, the Company authorized 7.5 million preference shares at $0.002 par value. The 7.5 million authorized preference shares remained unissued as of December 31, 2017.2020. Preference shares may be issued from time to time in one or more series, each of such series to have such voting powers (full or limited or without voting powers), designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions as determined by the Company’s board of directors.


Dividends

Dividends

On April 28, 2014, the

The Company announced that its board of directors approved terminating its quarterlyhas not declared or paid cash dividend and instead utilizing the cash to repurchase additional common shares. dividends since 2014. The declaration of future dividends is subject to the discretion of the Company’s board of directors and will depend upon various factors, including its earnings, financial condition, Herbalife Nutrition Ltd.’s available distributable reserves under Cayman Islands law, restrictions imposed by the 2018 Credit Facility and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by its board of directors.The
125

On
November 4, 2020, the Company’s Board of Directors declared a pro rata distribution of stock purchase warrants to the Company’s shareholders of one warrant for every four common shares held. Each warrant would have entitled the holder to purchase an Herbalife Nutrition common share at an exercise price of
 $67.50
per share where the Company did not pay or declare any dividends duringwould have had the fiscal years ended December 31, 2017, 2016, and 2015.

option to net share settle these warrants if they were exercised in the future. On November 10, 2020, the Company’s Board of Directors announced

that, after considering additional feedback from its shareholders, the Company will no longer move forward with its intended distribution of warrants.
Share Repurchases

On February 21, 2017,October 30, 2018, the Company’s board of directors authorized a new three-yearfive-year $1.5 billion share repurchase program that will expire on February 21, 2020,October 30, 2023, which replaced the Company’s prior share repurchase authorization whichthat was set to expire on June 30, 2017 which, as of December 31, 2016,February 21, 2020 and had approximately $233$113.3 million of remaining authorized capacity.capacity when it was replaced. This share repurchase program allows the Company, which includes an indirect wholly ownedwholly-owned subsidiary of Herbalife Nutrition Ltd., to repurchase the Company’s common shares at such times and prices as determined by the Company’s management, as market conditions warrant, and to the extent Herbalife Nutrition Ltd.’s distributable reserves are available under Cayman Islands law. The 2018 Credit Facility permits the Company to repurchase its common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met.

As of December 31, 2020, the remaining authorized capacity under the Company’s $1.5 billion share repurchase program was $607.9 million.

In conjunction with the issuance of the 2019 Convertible Notes during February 2014, the Company paid approximately $685.8 million to enter into prepaid forward share repurchase transactions, or the Forward Transactions with certain financial institutions, or the Forward Counterparties, pursuant to which the Company purchased approximately 9.919.9 million common shares,, at an average cost of $69.02$34.51 per share, for settlement on or around the August 15, 2019 maturity date for the 2019 Convertible Notes, subject to the ability of each Forward Counterparty to elect to settle all or a portion of its Forward Transactions early. The Forward Transactions were generally expected to facilitate privately negotiated derivative transactions between the Forward Counterparties and holders of the 2019 Convertible Notes, including swaps, relating to the common shares by which holders of the 2019 Convertible Notes establish short positions relating to the common shares and otherwise hedge their investments in the 2019 Convertible Notes concurrently with, or shortly after, the pricing of the 2019 Convertible Notes. The approximate 19.9 million common shares effectively repurchased through the Forward Transactions were treated as retired shares for basic and diluted EPS purposes. During the years ended December 31, 2019 and 2018, the Forward Counterparties delivered approximately 6.0 million and 13.9 million shares, respectively, to the Company, which were subsequently retired by the Company. As of December 31, 20
19
, the Forward Counterparties had delivered all of the approximate 19.9 million common shares effectively repurchased through the Forward Transactions and 0 shares remained legally outstanding.
As a result of the Forward Transactions, the Company’s total shareholders’ (deficit) equity within its consolidated balance sheet was reduced by approximately $685.8 million during the first quarter of 2014, with amounts of $653.9 million and $31.9 million being allocated between (accumulated deficit) retained earnings and additional paid-in capital, respectively, within total shareholders’ (deficit) equity. Also, upon executing the Forward Transactions, the Company recorded, at fair value, $35.8 million in non-cash issuance costs to other assets and a corresponding amount to additional paid-in capital within its consolidated balance sheet. These non-cash issuance costs will bewere amortized to interest expense over the contractual term of the Forward Transactions. For each ofDuring the years ended December 31, 2017, 2016,2019 and 2015,2018, the Company recognized $6.5$1.2 million and $9.2 million, respectively, of non-cash interest expense within its consolidated statement of income relating to amortization of these non-cash issuance costs.

costs within its consolidated statements of income.

In August 2020, the Company completed its modified Dutch auction tender offer and then subsequently paid cash to repurchase and retire a total of approximately 15.4 million of its common shares at an aggregate cost of approximately $750.0 million, or $48.75 per share. In addition, during the year ended December 31, 2020, the Company repurchased approximately 3.0 million of its common shares through open-market purchases
at an
126

aggregate cost of
approximately $
142.1
 million, or an average cost of $
47.40
per share, and subsequently retired these shares. During the year ended December 
31 2017,
,
2019
, the Company did not repurchase any of its common shares through open-market purchases. In May 
2018
, the Company completed its modified Dutch auction tender offer and then subsequently paid cash to repurchase and retire a total of approximately
11.4
 million of its common shares at an aggregate cost of approximately $
600.0
 million, or $
52.50
per share. In addition, during the year ended December 
31
,
2018
, an indirect wholly ownedwholly-owned subsidiary of the Company purchased approximately 5.0 million
8,400
of
Herbalife Nutrition Ltd.’s common shares through open marketopen-market purchases at an aggregate cost of approximately $328.6$
0.3
 million, or an average cost of $65.61 $
33.90
per share.
As of both
December 
31
,
2020
and
2019
, the Company held approximately
10.0
 million of treasury shares for U.S. GAAP purposes. These share repurchases reducedtreasury shares increased the Company’s total shareholders’ equitydeficit and are reflected at cost within the Company’s accompanying consolidated balance sheet.sheets. Although these shares are owned by an indirect wholly ownedwholly-owned subsidiary of the Company and remain legally outstanding, they are reflected as treasury shares under U.S. GAAP and therefore reduce the number of common shares outstanding within the Company’s consolidated financial statements and the weighted-average number of common shares outstanding used in calculating earnings per share. The common shares of Herbalife Nutrition Ltd. held by the indirect wholly ownedwholly-owned subsidiary, however, remain outstanding on the books and records of the Company’s transfer agent and therefore still carry voting and other share rights related to ownership of the Company’s common shares, which may be exercised. So long as it is consistent with applicable laws, such shares will be voted by such subsidiary in the same manner, and to the maximum extent possible in the same proportion, as all other votes cast with respect to any matter properly submitted to a vote of Herbalife Nutrition Ltd.’s shareholders. As of December 31, 2017, the Company held approximately 5.0 million of treasury shares for U.S. GAAP purposes. In October 2017, the Company’s parent completed its modified Dutch auction tender offer and then subsequently paid cash to repurchase and retire a total of approximately 6.7 million of its common shares at an aggregate cost of approximately $457.8 million, or $68.00 per share. In total, the Company repurchased 11.7 million of its common shares at an aggregate cost of approximately $786.4 million, or an average cost of $66.98 per share, during the year ended December 31, 2017. The Company did not repurchase any of its common shares in the open market during the years ended December 31, 2016 and 2015. As of December 31, 2017, the remaining authorized capacity under the Company’s $1.5 billion share repurchase program was $713.6 million.


In connection with the Company’s October 2017 modified Dutch auction tender offer, the Company incurred $1.6 million in transaction costs and also provided a non-transferable contractual CVR for each share tendered, allowing participants in the tender offer to receive a contingent cash payment in the event Herbalife iswas acquired in a going-private transaction (as defined in the CVR Agreement) within two years of the commencement of the tender offer. The initial fair value of the CVR was $7.3 million, which was recorded as a liability in the fourth quarter of 2017 with a corresponding decrease to shareholders’ equity. In determining the initial fair value of the CVR, the Company used a lattice model, which included inputs such as the underlying stock price, strike price, time to expiration, and dividend yield. Subsequent changes in the fair value of the CVR liability, using a similar valuation approach as the initial fair value determination, arewere recognized within the Company'sCompany’s consolidated balance sheetsheets with corresponding gains or losses being recognized in non-operatingother expense (income), net within the Company'sCompany’s consolidated statements of income during each reporting period until the CVR expiresexpired in August 2019 or iswas terminated due to a going-private transaction. Astransaction, which was also incorporated in the valuation of December 31, 2017,the CVR; this going-private probability input was considered to be a Level 3 input in the fair value hierarchy and any increase or decrease in this input could have significantly impacted the fair value of the CVR was $6.9 million.

as of the reporting date. The approximate 9.9 million common shares effectively repurchased throughCVR expired without value on August 21, 2019, the Forward Transactions are treated as retired shares for basic and diluted EPS purposes although they remain legally outstanding. two-year anniversary of August 21, 2017, the date the Company commenced the related modified Dutch auction tender offer.

During the yearsyear ended December 31, 2017, 2016, and 2015,2019, the Company also withheld shares onrecognized a $15.7 million gain in other expense (income), net within its vested restricted stock units and exercised SARs relatingconsolidated statement of income due to its share-based compensation plans, which are treated as share repurchasesthe change in the Company’sfair value of the CVR, which was driven by its expiration during August 2019. During the year ended December 31, 2018, the Company recognized an $8.8 million loss in other expense (income), net within its consolidated financial statements as discussed further below.

The Company reflectsstatement of income due to the aggregate purchase pricechange in the fair value of its common shares repurchased as a reduction to (increase in) shareholders’ (deficit) equity. The Company allocated the purchaseCVR, which was primarily driven by an increase in the market price of the repurchased shares to (accumulated deficit) retained earnings,Company’s common shares, and additional paid-in capital, withpartially offset by a decrease in the exceptionprobability of treasury shares, which are recorded separately ona going-private transaction as a result of the Company’s consolidated balance sheets.

shortening term of the CVR before it expired pursuant to its terms.

The number of shares issued upon vesting or exercise for certain restricted stock units and SARs granted pursuant to the Company’s share-based compensation plans is net of the minimum statutory withholding requirements that the Company pays on behalf of its employees. Although shares withheld are not issued, they are treated as common share repurchases in the Company’s consolidated financial statements, as they reduce the
number of
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shares
that would have been issued upon vesting. These shares do not count against the authorized capacity under the Company’s share repurchase program described above.

For During the years ended December 

31 2017, 2016,
,
2020
,
2019
, and
2018
, the Company withheld shares on its vested restricted stock units and 2015,exercised SARs relating to its share-based compensation plans.
The Company reflects the aggregate purchase price of its common shares repurchased as an increase to shareholders’ deficit. The Company generally allocated the purchase price of the repurchased shares to accumulated deficit, common shares, and additional paid-in capital, with the exception of treasury shares, which are recorded separately on the Company’s consolidated balance sheets.
For the years
ended December 
31
,
2020
,
2019
, and
2018
, the Company’s share repurchases, inclusive of transaction costs, were $
893.9
 million,
0
, and the issuance of the CVR, were $795.3$
600.7
 million, none, and none, respectively, under the Company’s share repurchase programs, which include open-market purchases and $60.4the tender offers described above, and $
29.6
 million, $13.2$
16.7
 million, and $16.6$
145.4
 million, respectively, due to shares withheld for tax purposes related to the Company’s share-based compensation plans. For the years ended December 
31 2017, 2016,
,
2020
,
2019
, and 2015,
2018
, the Company’s total share repurchases, including shares withheld for tax purposes, were $855.7$
923.5
 million, $13.2$
16.7
 million, and $16.6$
746.1
 million, respectively, and have been recorded as a reductionan increase to shareholders’ equitydeficit within the Company’s consolidated balance sheet as of December 31, 2017.sheets. The Company recorded $844.2$
750.3
 million of total share repurchases within financing activities on its consolidated statement of cash flows for the year ended December 
31 2017,
,
2018
, which excludes the $7.3 million initial fair value of the CVR and $4.2includes $
4.2
 million of share repurchases for which payment was made subsequent to the year end and thereforethat were reflected as a liabilityan increase to shareholders’ deficit within the Company’s consolidated balance sheet as of December 
31 2017.

,
2017
but were subsequently paid during the year ended December 
31
,
2018
.
Capped Call Transactions

Transaction

s
In February 2014, in connection with the issuance of the 2019 Convertible Notes, the Company paid approximately $123.8 million to enter into capped call transactions with respect to its common shares, or the Capped Call Transactions with certain financial institutions. The Capped Call Transactions arewere expected generally to reduce the potential dilution upon conversion of the 2019 Convertible Notes in the event that the market price of the common shares iswas greater than the strike price of the Capped Call Transactions, initially set at $86.28$43.14 per common share, with such reduction of potential dilution subject to a cap based on the cap price initially set at $120.79$60.39 per common share. The strike price and cap price arewere subject to certain adjustments under the terms of the Capped Call Transactions. Therefore, as a result of executing the Capped Call Transactions, the Company in effect willwas only be exposed to potential net dilution once the market price of its common shares exceedsexceeded the adjusted cap price. As a result of the Capped Call Transactions, the Company’s additional paid-in capital within shareholders’ (deficit) equitydeficit on its consolidated balance sheet was reduced by $123.8 million during the first quarter of 2014.


During March 2018, in connection with the Company’s repurchase of a portion of the 2019 Convertible Notes, the Company entered into partial settlement agreements with the option counterparties to the Capped Call Transactions to terminate a portion of such existing transactions, in each case, in a notional amount corresponding to the aggregate principal amount of 2019 Convertible Notes that were repurchased. As a result of terminating a portion of the Capped Call Transactions, which were in a favorable position, the Company received $55.9 million in cash and recognized an offsetting increase to additional paid-in capital during 2018.

On August 15, 2019, the 2019 Convertible Notes matured and the remaining Capped Call Transactions expired unexercised. The expiration of the Capped Call Transactions did not have an impact on the Company’s consolidated financial statements
.
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Accumulated Other Comprehensive Income (Loss)

Loss

The following table summarizes changes in accumulated other comprehensive income (loss)loss by component during the years ended December 31, 2017, 2016,2020, 2019, and 2015:

2018:

 

 

Changes in Accumulated Other Comprehensive

Income (Loss) by Component

 

 

 

Foreign

Currency

Translation

Adjustments

 

 

Unrealized

Gain (Loss) on

Derivatives

 

 

Other

 

 

Total

 

 

(In millions)

 

Balance as of December 31, 2014

 

$

(96.4

)

 

$

18.0

 

 

$

0.2

 

 

$

(78.2

)

Other comprehensive income (loss) before

    reclassifications, net of tax

 

 

(86.6

)

 

 

15.4

 

 

 

(1.7

)

 

 

(72.9

)

Amounts reclassified from accumulated

    other comprehensive income (loss) to

    income, net of tax(1)

 

 

 

 

 

(16.0

)

 

 

1.6

 

 

 

(14.4

)

Total other comprehensive income (loss), net of

    reclassifications

 

 

(86.6

)

 

 

(0.6

)

 

 

(0.1

)

 

 

(87.3

)

Balance as of December 31, 2015

 

$

(183.0

)

 

$

17.4

 

 

$

0.1

 

 

$

(165.5

)

Other comprehensive income (loss) before

    reclassifications, net of tax

 

 

(32.5

)

 

 

8.4

 

 

 

 

 

 

(24.1

)

Amounts reclassified from accumulated

    other comprehensive income (loss) to

    income, net of tax(1)

 

 

 

 

 

(15.4

)

 

 

(0.1

)

 

 

(15.5

)

Total other comprehensive income (loss), net of

    reclassifications

 

 

(32.5

)

 

 

(7.0

)

 

 

(0.1

)

 

 

(39.6

)

Balance as of December 31, 2016

 

$

(215.5

)

 

$

10.4

 

 

$

 

 

$

(205.1

)

Other comprehensive income (loss) before

    reclassifications, net of tax

 

 

44.9

 

 

 

(7.9

)

 

 

 

 

 

37.0

 

Amounts reclassified from accumulated

    other comprehensive income (loss) to

    income, net of tax(1)

 

 

 

 

 

2.7

 

 

 

 

 

 

2.7

 

Total other comprehensive income (loss), net of

    reclassifications

 

 

44.9

 

 

 

(5.2

)

 

 

 

 

 

39.7

 

Balance as of December 31, 2017

 

$

(170.6

)

 

$

5.2

 

 

$

 

 

$

(165.4

)

  
Changes in Accumulated Other Comprehensive Loss by Component
  
Foreign Currency
    Translation Adjustments    
 
Unrealized Gain
    (Loss) on Derivatives    
 
    Total    
  
(in millions)
Balance as of December 31, 2017
  $(170.6  $5.2   $(165.4
Other comprehensive loss before reclassifications, net of tax
   (41.0   (3.6   (44.6
Amounts reclassified from accumulated other comprehensive loss to
income, net of tax(1)
   —      0.2    0.2 
                
Total other comprehensive loss, net of reclassifications
   (41.0   (3.4   (44.4
                
Balance as of December 31, 2018
   (211.6   1.8    (209.8
Other comprehensive loss before reclassifications, net of tax   —      (1.9   (1.9
Amounts reclassified from accumulated other comprehensive loss to income, net of tax(1)
   —      (0.8   (0.8
                
Total other comprehensive loss, net of reclassifications   —      (2.7   (2.7
                
Balance as of December 31, 2019
   (211.6   (0.9   (212.5
Other comprehensive income before reclassifications, net of tax
   33.2    1.7    34.9 
Amounts reclassified from accumulated other comprehensive loss to income, net of tax(1)
   —      (4.6   (4.6
                
Total other comprehensive income (loss), net of reclassifications
   33.2    (2.9   30.3 
                
Balance as of December 31, 2020
  $(178.4  $(3.8  $(182.2
                

(1)

See Note 2,
Basis of Presentation
, and Note 11,
Derivative Instruments and Hedging Activities
, for information regarding the location in the consolidated statements of income of gains (losses) reclassified from accumulated other comprehensive income (loss) intoloss to income during the years ended December 31, 2017, 2016,2020, 2019, and 2015.

2018.

Other comprehensive income (loss)
loss
 before reclassifications was net of tax expensebenefit of $5.7 million for foreign currency translation adjustments for the year ended December 31, 2017.

Other comprehensive income (loss) before reclassifications was net of tax expense of $5.2$2.0 million and tax benefits of $0.3$0.6 million for foreign currency translation adjustments and unrealized gain (loss) on derivatives, respectively, for the year ended December 31, 2016.2020. Amounts reclassified from accumulated other comprehensive income (loss)loss to income was net of tax expense of $0.2 million for unrealized gain (loss) on derivatives for the year ended December 31, 2020.

Other comprehensive
loss
 before reclassifications was net of tax expense of $0.1 million for unrealized gain (loss) on available-for-sale investmentsforeign currency translation adjustments for the year ended December 31, 2016.

2019.

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Other comprehensive income (loss)loss before reclassifications was net of tax benefitsbenefit of $7.2 million, $0.6 million, and $0.9$2.7 million for foreign currency translation adjustments unrealized gain (loss) on derivatives, and unrealized gain (loss) on available-for-sale investments, respectively, for the year ended December 31, 2015. Amounts reclassified from accumulated other comprehensive income (loss) to income was net of tax expense of $0.8 million for unrealized gain (loss) on available-for-sale investments for the year ended December 31, 2015.

2018.

9. Share-Based Compensation

The Company has fourthe following share-based compensation plans: the Amended and Restated Herbalife Ltd. 2005 Stock Incentive Plan, or the 2005 Stock Incentive Plan, and the Amended and Restated Herbalife Ltd. 2014 Stock Incentive Plan, or the 2014 Stock Incentive Plan,Plan. Additionally, the Amended and Restated Herbalife Ltd. Independent Directors Deferred Compensation and Stock Unit Plan, or the Independent Director Stock Unit Plan, andCompany has the Amended and Restated Non-Management Directors Compensation Plan, or the Non-Management Directors Plan, the purpose of which is to facilitate equity ownership in the Company by its directors through equity awards under the 2005 Stock Incentive Plan, and for grants made on and after April 30, 2014, under the 2014 Stock Incentive Plan. The 2014 Stock Incentive Plan replaced the 2005 Stock Incentive Plan and after the adoption thereof, no0 additional awards were made under the 2005 Stock Incentive Plan. The terms of the 2014 Stock Incentive Plan are substantially similar to the terms of the 2005 Stock Incentive Plan. The 2014 Stock Incentive Plan authorizes the issuance of 8,700,00017.4 million common shares pursuant to awards granted under the plan, plus any shares that remained available for issuance under the 2005 Stock Incentive Plan as of April 29, 2014. The purpose of the Independent Directors Stock Unit Plan and the Non-Management Directors Plan is to facilitate equity ownership in the Company by its directors through equity awards. As of December 31, 2017,2020, an aggregate of approximately 4.22.3 million common shares remain available for future issuance under the 2014 Stock Incentive Plan.

The Company’s share-based compensation plans generally provide for grants of stock options, stock appreciation rights, or SARs, and stock unit awards, which are collectively referred to herein as awards. Previously, stock options generally vested quarterly over a five-year period or less, beginning on the grant date. Certain SARs generally vest annually over a three-year period. The contractual term of stock options and SARs is generally ten years. Certain stock unit awards under the 2014 Stock Incentive Plan vest annually over a three yearthree-year period. Certain stock unit awards subject to service and performance conditions vest after the passage of a performance period as determined by the compensation committee of the Company’s board of directors. Stock unit awards granted to directors generally vest over a one-year period.

Awards can be subject to the following: market and service conditions, or market condition awards; performance and service conditions, or performance condition awards; market, service and performance conditions, or market and performance condition awards; or be subject only to continued service with the Company, or service condition awards. All awards granted by the Company are market condition awards, performance condition awards, market and performance condition awards, or service condition awards. Unless otherwise determined at the time of grant, upon vesting, each stock unit award represents the right to receive one common share. For stock unit awards, the Company issues new shares, net of shares withheld for tax purposes, when vested. For SARs, the Company issues new shares based on the intrinsic value when exercised, net of shares withheld for tax purposes. The Company’s stock compensation awards outstanding as of December 31, 2017 include2020 included SARs and stock unit awards.

During the years ended December 31, 2017, 2016, and 2015, the Company granted

The SARs with performance conditions to certain employees. These awards generally vest 20%
20
% in the first succeeding year, 20%
20
% in the second succeeding year, and 60%
60
% in the third succeeding year, subject to achievement of certain sales leader retention metrics. The fair value of these SARs was determined on the date of grant using the Black-Scholes-Merton option pricing model. The compensation expense for these grants is recognized over the vesting term using the graded vesting
method.

During The Company did not grant any SARs with performance conditions during the years ended December 31, 2017, 2016,2020, 2019 and 2015, the Company granted2018.

The fair value of SARs with service conditions to certain employees. The fair value of these SARs was determined on the date of grant using the Black-Scholes-Merton option pricing model. The compensation expense for these grants is recognized over the vesting term using the straight line method.

During The Company did not grant any SARs with service conditions during the yearyears ended December 31, 2017,2020, 2019, and 2018.

During the years ended December 31, 2020, 2019, and 2018, the Company granted performance stock unit awards to certain executives, which will vest on December 31, 20192022, December 31, 2021, and December 31,
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Table of Contents
2020, respectively, subject to their continued employment through that date and the achievement of certain performance conditions. TheGenerally, performance conditions include targets for local currency net sales, Volume Points, adjusted earnings before interest and taxes, andand/or adjusted earnings per share. These performance stock unit awards can vest at
between 0% and 200% of the target award based on the achievement of the performance conditions.

During the yearyears ended December 31, 2017,2020, 2019, and 2018, the Company granted stock unit awards with service conditions to directors and certain employees.

employees, which generally vest annually over a one-year and three-year period, respectively.

Share-based compensation expense is included in selling, general, and administrative expenses inwithin the Company’s consolidated statements of income. ForThe Company’s policy is to estimate the years ended December 31, 2017, 2016, and 2015, share-basednumber of forfeitures expected to occur. Share-based compensation expense relating to service condition awards amounted to $24.4$38.3 million, $23.9$31.8 million, and $26.8$26.2 million respectively. Forfor the years ended December 31, 2017, 2016,2020, 2019, and 2015, share-based2018, respectively. Share-based compensation expense relating to market condition awards amounted to $1.30, 0, and less than $0.1 million $0.4 million, and $0.3 million, respectively. Forfor the years ended December 31, 2017, 2016,2020, 2019, and 2015, share-based2018, respectively. Share-based compensation expense relating to performance condition awards amounted to $16.4$12.7 million, $15.9$6.8 million, and $17.8$9.2 million respectively. No share-based compensation expense related to market and performance condition awards was recognized infor the years ended December 31, 2017, 2016,2020, 2019, and 2015. For the years ended December 31, 2017, 2016, and 2015, the2018, respectively. The related income tax benefits recognized in earnings for all awards amounted to $9.4$9.6 million, $14.8$8.3 million, and $16.6$8.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Excess tax benefits on share-based compensation arrangements totaled $3.1 million, $5.8 million, and $53.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.

As of December 31, 2017,2020, the total unrecognized compensation cost related to non-vested service condition stock awards was $29.2$55.0 million and the related weighted-average period over which it is expected to be recognized is approximately 1.41.3 years. As of December 31, 2017,2020, the total unrecognized compensation cost related to non-vested performance condition awards was $15.1$18.3 million and the related weighted-average period over which it is expected to be recognized is approximately 1.71.8 years. As of December 31, 2017, the total unrecognized compensation cost related to non-vested market condition stock awards was less than $0.1 million and the related weighted-average period over which it is expected to be recognized is approximately 0.2 years.

Stock unit awards are valued at the market value on the date of grant. The fair value of service condition SARs and performance condition SARs are estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The fair value of SARs with market conditions or with market and performance conditions are estimated on the date of grant using the Monte Carlo lattice model. The Company calculates the expected term of its SARs based on historical data. All groups of employees have been determined to have similar historical exercise patterns for valuation purposes. The expected volatility of the SARs is based upon the historical volatility of the Company’s common shares and is also validated against the volatility rates of a peer group of companies. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the SARs. The expected dividend yield assumption is based on the Company’s historical and expected amount of dividend payouts.

There were no stock options0 SARs granted during the years ended December 31, 2017, 2016,2020, 2019, and 2015. There were no SARs granted to independent directors during the years ended December 31, 2017, 2016, and 2015. 2018.
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Table of Contents
The following table summarizes the weighted average assumptions used inactivities for all SARs under the calculation of the fair value for service condition awards for the years ended December 31, 2017, 2016, and 2015:

 

 

SARs

 

 

 

Year Ended

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Expected volatility

 

 

49.2

%

 

 

49.6

%

 

 

48.7

%

Dividends yield

 

 

0.0

%

 

 

0.1

%

 

 

1.6

%

Expected term

 

6.0 years

 

 

6.0 years

 

 

5.8 years

 

Risk-free interest rate

 

 

2.2

%

 

 

1.2

%

 

 

1.6

%

The following table summarizes the weighted average assumptions used in the calculation of the fair value for performance condition awards granted during the years ended December 31, 2017, 2016, and 2015:

 

 

SARs

 

 

 

Year Ended

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Expected volatility

 

 

49.6

%

 

 

49.6

%

 

 

48.8

%

Dividends yield

 

 

0.0

%

 

 

0.0

%

 

 

1.6

%

Expected term

 

6.1 years

 

 

6.0 years

 

 

5.8 years

 

Risk-free interest rate

 

 

2.2

%

 

 

1.2

%

 

 

1.6

%


The following tables summarize the activity under allCompany’s share-based compensation plans which includes all stock awards, for the year ended December 31, 2017:

2020:

Stock Options & SARs

 

Awards

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual Term

 

Aggregate

Intrinsic

Value(1)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

(In millions)

 

Outstanding as of December 31, 2016(2) (3)

 

 

11,998

 

 

$

41.52

 

 

6.0 years

 

$

148.7

 

Granted

 

 

1,362

 

 

$

57.33

 

 

 

 

 

 

 

Exercised

 

 

(3,394

)

 

$

31.86

 

 

 

 

 

 

 

Forfeited

 

 

(369

)

 

$

53.59

 

 

 

 

 

 

 

Outstanding as of December 31, 2017(2) (3)

 

 

9,597

 

 

$

46.72

 

 

6.2 years

 

$

212.0

 

Exercisable as of December 31, 2017(4)

 

 

5,438

 

 

$

46.30

 

 

4.8 years

 

$

126.9

 

  
Number of
Awards
 
Weighted-
Average
Exercise Price
Per Award
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value(1)
  
(in thousands)
     
(in millions)
Outstanding as of December 31, 2019(2)(3)
   7,001   $27.85    5.4 years   $138.7 
Grante
d
   —     $—             
Exercised(4)
   (3,257)  $28.56           
Forfeited
   (7)  $29.03           
                     
Outstanding as of December 31, 2020(2)(3)
   3,737   $27.23    4.6 years   $77.8 
                     
Exercisable as of December 31, 2020(2)(5)
   3,737   $27.23    4.6 years   $77.8 
                     
Vested and expected to vest as of December 31, 2020
   3,737   $27.23    4.6 years   $77.8 
                     

(1)

The intrinsic value is the amount by which the current market value of the underlying stock exceeds the exercise price of the stock award.

awards.

(2)

Includes 0.1 million andless than 0.1 million market condition SARS as of both December 31, 20172020 and 2016, respectively.

2019.

(3)

Includes 3.11.1 million and 2.9 million performance condition SARs as of December 31, 20172020 and 2016,2019, respectively.

(4)

Includes 1.51.8 million performance condition SARs.

The weighted-average grant date fair value of service condition SARs granted during the years ended December 31, 2017, 2016, and 2015 was $28.64, $29.33, and $12.57, respectively. The weighted-average grant date fair value of SARs with performance conditions granted during the years ended December 31, 2017, 2016, and 2015 was $28.32, $29.69, and $13.65, respectively.
(5)
Includes less than 0.1 million market condition and 1.1 million performance condition SARs.

The total intrinsic value of service condition stock options and SARs exercised during the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was $122.8$28.0 million, $32.3$33.7 million, and $25.5$211.0 million, respectively. The total intrinsic value of performance condition SARs exercised during the years ended December 31, 2017,2020, 2019, and 20162018 was $3.1$28.8 million, $0.1 million, and $0.7$95.0 million, respectively. The total intrinsic value of market condition SARS exercised during the year ended December 31, 2015 was $11.4 million. There were no market condition SARSSARs exercised during the years ended December 31, 20172020, 2019, and 2016.

2018 was 0, 0, and $7.8 million.

The following table summarizes the activities for all stock units primarily relating to directors ofunder the Company,Company’s share-based compensation plans for the year ended December 31, 2017:

2020:

Incentive Plan and Independent Directors Stock Units

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

 

 

(In thousands)

 

 

 

 

 

Outstanding and nonvested as of December 31, 2016

 

 

26

 

 

$

62.35

 

Granted(1)

 

 

162

 

 

$

68.74

 

Vested

 

 

(25

)

 

$

62.40

 

Forfeited

 

 

 

 

 

 

Outstanding and nonvested as of December 31, 2017

 

 

163

 

 

$

68.69

 

  
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
Per Share
  
(in thousands)
  
Outstanding and nonvested as of December 31, 2019(1)
   1,833
 
 
 
 
 
 
 
  $49.49
 
 
 
 
Granted(2)
   1,995   $39.67 
Vested
(3)
   (566  $46.53 
Forfeited
(4)
   (194  $43.79 
           
Outstanding and nonvested as of December 31, 2020(1)
   3,068   $44.01 
           
Expected to vest as of December 31, 2020(
5
)
   2,846   $43.66 
           

(1)

This includes 134,388

Includes 712,596 and 475,430 performance based stock unit awards as of December 31, 2020 and 2019, respectively, which represents the maximum amount that can vest.

(2)
Includes 504,908 performance-based stock unit awards.

(3)
Includes
228,996 performance-based stock unit awards.
132

(4)
Includes
38,746
performance-based stock unit awards.
(5)Includes 561,280 performance-based stock unit awards.
The total vesting date fair value of stock units which vested during the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was $2.0$23.0 million, $2.1$13.0 million, and $1.3$2.2 million, respectively.

Employee Stock Purchase Plan

During 2007, the Company adopted a qualified employee stock purchase plan, or ESPP, which was implemented during the first quarter of 2008. In connection with the adoption of the ESPP, the Company has reserved for issuance a total of 24.0 million common shares. As of December 31, 2017,2020, approximately 1.73.1 million common shares remain available for future issuance. Under the terms of the ESPP, rights to purchase common shares may be granted to eligible qualified employees subject to certain restrictions. The ESPP enables the Company’s eligible employees, through payroll withholdings, to purchase a limited number of common shares at 85% of the fair market value of a common share at the purchase date. Purchases are made on a quarterly basis.


10. Segment Information

The Company is a nutrition company that sells a wide range of weight management,management; targeted nutrition,nutrition; energy, sports, & fitness,and fitness; and outer nutrition products. The Company’s products are manufactured by the Company in its Changsha, Hunan, China extraction facility,facility; Suzhou, China facility,facility; Nanjing, China Facility,facility; Lake Forest, California facility,facility; and Winston-Salem, North Carolina facility, andas well as by third partythird-party providers, and then are sold to Members who consume and sell Herbalife products to retail consumers or other Members. Revenues reflect sales of products by the Company to its Members and are categorized based on geographic location.

As of December 31, 2017,2020, the Company sold products in 94 countries 95
markets
throughout the world and was organized and managed by six geographic regions: North America, Mexico, South &and Central America, EMEA, (Europe, Middle East, and Africa), Asia Pacific, and China. China. The Company defines its operating segments as those geographical operations. The Company aggregates its operating segments, excluding China, into a reporting segment, or the Primary Reporting Segment, as management believes that the Company’s operating segments have similar operating characteristics and similar long termlong-term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, the nature of the regulatory environment, and their economic characteristics. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. TheThe Company reviews its net sales and contribution margin by operating segment, and reviews its assets and capital expenditures on a consolidated basis and not by operating segment. Therefore, net sales and contribution margin are presented by reportable segment and assets and capital expenditures by segment are not presented.The operating
133

Operating information for the two2 reportable segments, and sales by product line, and sales by geographic area are as follows:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

Primary Reporting Segment

 

$

3,541.8

 

 

$

3,619.6

 

 

$

3,622.8

 

China

 

 

885.9

 

 

 

868.8

 

 

 

846.2

 

Total Net Sales

 

$

4,427.7

 

 

$

4,488.4

 

 

$

4,469.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution Margin(1):

 

 

 

 

 

 

 

 

 

 

 

 

Primary Reporting Segment

 

$

1,534.2

 

 

$

1,571.9

 

 

$

1,598.8

 

China(2)

 

 

790.7

 

 

 

789.3

 

 

 

762.8

 

Total Contribution Margin

 

$

2,324.9

 

 

$

2,361.2

 

 

$

2,361.6

 

Selling, general and administrative expense(2)

 

 

1,758.6

 

 

 

1,966.9

 

 

 

1,784.5

 

Other operating income

 

 

(50.8

)

 

 

(63.8

)

 

 

(6.5

)

Interest expense

 

 

160.8

 

 

 

99.3

 

 

 

100.5

 

Interest income

 

 

14.5

 

 

 

5.9

 

 

 

5.6

 

Other expense, net

 

 

(0.4

)

 

 

 

 

 

2.3

 

Income before income taxes

 

 

471.2

 

 

 

364.7

 

 

 

486.4

 

Income taxes

 

 

257.3

 

 

 

104.7

 

 

 

147.3

 

Net Income

 

$

213.9

 

 

$

260.0

 

 

$

339.1

 


 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Net sales by product line:

 

 

 

 

 

 

 

 

 

 

 

 

Weight Management

 

$

2,842.5

 

 

$

2,864.5

 

 

$

2,862.8

 

Targeted Nutrition

 

 

1,082.8

 

 

 

1,062.8

 

 

 

1,015.4

 

Energy, Sports & Fitness

 

 

263.8

 

 

 

268.4

 

 

 

250.9

 

Outer Nutrition

 

 

93.9

 

 

 

110.4

 

 

 

133.0

 

Literature, Promotional and Other(3)

 

 

144.7

 

 

 

182.3

 

 

 

206.9

 

Total Net Sales

 

$

4,427.7

 

 

$

4,488.4

 

 

$

4,469.0

 

Net sales by geographic area:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

818.3

 

 

$

935.0

 

 

$

860.0

 

Mexico

 

 

442.7

 

 

 

446.6

 

 

 

479.9

 

China

 

 

885.9

 

 

 

868.8

 

 

 

846.2

 

Others

 

 

2,280.8

 

 

 

2,238.0

 

 

 

2,282.9

 

Total Net Sales

 

$

4,427.7

 

 

$

4,488.4

 

 

$

4,469.0

 

   
 
Year Ended December 31,
 
   
 
2020
   
 
2019
   
 
2018
 
    
(in millions)
 
Net sales:
                  
Primary Reporting Segment
   $4,732.2    $4,125.1    $3,884.2 
China
    809.6     752.0     1,007.6 
                   
Total net sales
   $5,541.8    $4,877.1    $4,891.8 
                   
Contribution margin(1):
                  
Primary Reporting Segment
   $1,983.6    $1,793.6    $1,693.5 
China(2)
    717.5     677.3     915.0 
                   
Total contribution margin
   $2,701.1    $2,470.9    $2,608.5 
                   
Selling, general, and administrative expenses(2)
    2,075.0     1,940.3     1,955.2 
Other operating income
    (14.5    (37.5    (29.8
Interest expense
    133.0     153.0     181.0 
Interest income
    8.8     20.6     19.4 
Other expense (income), net
    —       (15.7    57.3 
                   
Income before income taxes
    516.4     451.4     464.2 
Income taxes
    143.8     140.4     167.6 
                   
Net income
   $372.6    $311.0    $296.6 
                   
Net sales by product line:
                  
Weight Management
   $3,312.8    $3,012.5    $3,105.8 
Targeted Nutrition
    1,527.4     1,278.5     1,243.5 
Energy, Sports, and Fitness
    437.4     352.0     308.4 
Outer Nutrition
    111.3     97.3     91.9 
Literature, Promotional, and Other(3)
    152.9     136.8     142.2 
                   
Total net sales
   $5,541.8    $4,877.1    $4,891.8 
                   
Net sales by geographic area:
                  
United States
   $1,334.5    $1,002.6    $925.9 
China
    809.6     752.0     1,007.6 
Mexico
    436.9     473.6     467.9 
Others
    2,960.8     2,648.9     2,490.4 
                   
Total net sales
   $5,541.8    $4,877.1    $4,891.8 
                   

(1)

Contribution margin consists of net sales less cost of sales and royaltyRoyalty overrides. For the China segment, contribution margin does not include service fees to China independent service providers.

(2)

Service fees to China independent service providers totaling $419.5$454.0 million, $407.1$418.9 million, and $403.5$523.2 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, are included in selling, general, and administrative expenses.

(3)

Product buy backsbuybacks and returns in all product categories are included in literature, promotionalthe Literature, Promotional, and otherOther category.

As of December 31, 20172020 and 2016,2019, goodwill allocated to the Company’s reporting units included in the Company’s Primary Reporting Segment was $93.6$97.2 million and $86.8$88.4 million, respectively. Goodwillrespectively, and goodwill allocated to the China segment was $3.3 million and $3.1 million, asrespectively.
134

The following table sets forth property, plant, and equipment and deferred tax assets by geographic area:

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Property, Plant and Equipment, net:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

289.8

 

 

$

290.7

 

 

$

264.2

 

Foreign

 

 

87.7

 

 

 

87.3

 

 

 

75.0

 

Total Property, Plant and Equipment, net

 

$

377.5

 

 

$

378.0

 

 

$

339.2

 

Deferred Tax Assets:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

103.6

 

 

$

218.7

 

 

$

188.5

 

Foreign

 

 

70.9

 

 

 

62.5

 

 

 

63.9

 

Total Deferred Tax Assets

 

$

174.5

 

 

$

281.2

 

 

$

252.4

 

The majority of the Company’s foreign subsidiaries designate their local currencies as their functional currency. As of December 31, 2017 and 2016, the total amount of cash held by foreign subsidiaries reported in the Company’s consolidated balance sheets was $1,133.5 million and $316.2 million, respectively, of which $633.3 million and $28.2 million, respectively, was maintained or invested in U.S. dollars. As of December 31, 2017 and 2016, the total amount of cash and cash equivalents held by the Company’s parent and its U.S. entities, inclusive of U.S. territories, was $145.3 million and $527.8 million, respectively.

   
December 31,
 
   
2020
   
2019
   
2018
 
   
(in millions)
 
Property, plant, and equipment, net:
               
United States
  $303.2   $292.4   $285.2 
Foreign
   87.0    79.1    74.8 
                
Total property, plant, and equipment, net
  $390.2   $371.5   $360.0 
                
Deferred tax assets:
               
United States
  $123.8   $114.5   $90.7 
Foreign
   76.6    68.3    74.9 
                
Total deferred tax assets
  $200.4   $182.8   $165.6 
                

11. Derivative Instruments and Hedging Activities

Interest Rate Risk Management
The Company engages in an interest rate hedging strategy for which the hedged transactions are forecasted interest payments on the Company’s 2018 Credit Facility, which are based on variable rates.
During the first quarter of 2020, the Company entered into various interest rate swap agreements with effective dates ranging between
February 2020 and March 2020. These agreements collectively provide for the Company to pay interest at a weighted-average fixed rate of 0.98% on aggregate notional amounts of $100.0 million under the 2018 Credit Facility until their respective expiration dates ranging between February 2022 and March 2023, while receiving interest based on LIBOR on the same notional amounts for the same periods. At inception, these swap agreements were designated as cash flow hedges against the variability in certain LIBOR-based borrowings under the 2018 Credit Facility, effectively fixing the interest rate on such notional amounts at a weighted-average effective rate of 3.48%. These hedge relationships qualified as effective under FASB ASC Topic 815,
Derivatives and Hedging
, or ASC 815, and consequently all changes in the fair value of these interest rate swaps are recorded as a component of accumulated other comprehensive loss within shareholders’ deficit, and are recognized in interest expense within the Company’s consolidated statement of income during the period when the hedged item and underlying transaction affect earnings. The fair values of the interest rate swap agreements are based on third-party bank quotes, and as of December 31, 2020, the Company recorded liabilities at fair value of $1.0 million relating to these interest rate swap agreements.
Foreign Currency Instruments

The Company designates certain foreign currency derivatives, primarily comprised of foreign currency forward contracts and option contracts, as freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of these freestanding derivatives are included in selling, general, and administrative expenses inwithin the Company’s consolidated statements of income. The Company primarily uses freestanding foreign currency derivatives to hedge foreign-currency-denominatedforeign currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The fair value of the freestanding foreign currency derivatives is based on third-party quotes. The Company’s foreign currency derivative contracts are generally executed on a monthly basis.

The Company designates as cash-flowcash flow hedges those foreign currency forward contracts it enters into to hedge forecasted inventory purchases and intercompany management fees that are subject to foreign currency exposures. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, designated as cash-flow hedges are recorded
135

as a component of accumulated other comprehensive income (loss)loss within shareholders’ (deficit) equity,deficit, and are recognized in cost of sales inwithin the Company’s consolidated statement of income during the period which approximates the time the hedged inventory is sold. The Company also hedges forecasted intercompany management fees over specific months. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, are recorded as a component of accumulated other comprehensive income (loss)loss within shareholders’ (deficit) equity,deficit, and are recognized in selling, general, and administrative expenses inwithin the Company’s consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.

The Company has elected to record changes in the fair value of amounts excluded from the assessment of effectiveness currently in

earnings
.
As of December 31, 20172020 and December 31, 2016,2019, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $104.9$56.4 million and $90.0$66.4 million, respectively. As of December 31, 2017,2020, these outstanding contracts were expected to mature over the next fifteen months. The Company’s derivative financial instruments are recorded on the consolidated balance sheets at fair value based on third-party quotes. As of December 31, 2017,2020, the Company recorded assets at fair value of $2.9 million and liabilities at fair value of $4.0$3.9 million relating to all outstanding foreign currency contracts designated as cash-flowcash flow hedges. As of December 31, 2016,2019, the Company recorded assets at fair value of $4.6$0.1 million and liabilities at fair value of $1.9 million relating to all outstanding foreign currency contracts designated as cash-flowcash flow hedges. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the years ended December 31, 2017, and 2016, the ineffective portion relating to these hedges was immaterialquarterly and the hedges remained effective as of December 31, 2017,2020 and 2019.
As of both December 31, 2016.

As of December 31, 20172020 and December 31, 2016,2019, the majority of the Company’s outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within one month asmonth.

The tables below provide information about the details of both December 31, 2017 and December 31, 2016.


The table below describes all foreign currency forward contracts that were outstanding as of December 31, 20172020 and December 31, 2016:

Foreign Currency

 

Average

Contract Rate

 

 

Original

Notional Amount

 

 

Fair Value

Gain (Loss)

 

 

 

 

 

 

 

(In millions)

 

 

(In millions)

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Buy Argentine peso sell Euro

 

 

21.40

 

 

$

0.5

 

 

$

 

Buy Australian dollar sell Euro

 

 

1.55

 

 

 

0.9

 

 

 

 

Buy Canadian dollar sell Euro

 

 

1.52

 

 

 

0.5

 

 

 

 

Buy Chilean peso sell Euro

 

 

749.55

 

 

 

0.6

 

 

 

 

Buy Chinese yuan sell Euro

 

 

8.03

 

 

 

25.9

 

 

 

0.4

 

Buy Euro sell Argentine peso

 

 

21.46

 

 

 

0.5

 

 

 

 

Buy Euro sell Australian dollar

 

 

1.56

 

 

 

4.8

 

 

 

(0.1

)

Buy Euro sell Canadian dollar

 

 

1.52

 

 

 

0.5

 

 

 

 

Buy Euro sell Chilean peso

 

 

749.35

 

 

 

1.1

 

 

 

 

Buy Euro sell Chinese yuan

 

 

7.84

 

 

 

26.5

 

 

 

0.2

 

Buy Euro sell Ghana cedi

 

 

5.61

 

 

 

3.0

 

 

 

(0.1

)

Buy Euro sell Hong Kong dollar

 

 

9.26

 

 

 

6.8

 

 

 

0.1

 

Buy Euro sell Indonesian rupiah

 

 

16,113.59

 

 

 

11.5

 

 

 

0.1

 

Buy Euro sell Japanese yen

 

 

133.88

 

 

 

0.4

 

 

 

 

Buy Euro sell Kazakhstani tenge

 

 

401.40

 

 

 

1.7

 

 

 

 

Buy Euro sell Mexican peso

 

 

22.65

 

 

 

59.1

 

 

 

3.6

 

Buy Euro sell Malaysian ringgit

 

 

4.84

 

 

 

1.6

 

 

 

 

Buy Euro sell Peruvian nuevo sol

 

 

3.85

 

 

 

4.9

 

 

 

 

Buy Euro sell Philippine peso

 

 

60.03

 

 

 

5.3

 

 

 

 

Buy Euro sell Russian ruble

 

 

70.38

 

 

 

10.8

 

 

 

(0.1

)

Buy Euro sell Thai baht

 

 

38.33

 

 

 

1.3

 

 

 

 

Buy Euro sell Taiwan dollar

 

 

35.59

 

 

 

0.6

 

 

 

 

Buy Euro sell U.S. dollar

 

 

1.18

 

 

 

59.1

 

 

 

0.9

 

Buy Euro sell South African rand

 

 

16.37

 

 

 

3.8

 

 

 

(0.3

)

Buy British pound sell Euro

 

 

0.88

 

 

 

3.4

 

 

 

(0.1

)

Buy British pound sell U.S. dollar

 

 

1.35

 

 

 

2.8

 

 

 

 

Buy Hong Kong dollar sell Euro

 

 

9.31

 

 

 

3.0

 

 

 

 

Buy Indonesian rupiah sell Euro

 

 

16,164.33

 

 

 

4.8

 

 

 

 

Buy Indonesian rupiah sell U.S. dollar

 

 

13,676.00

 

 

 

6.2

 

 

 

 

Buy Korean won sell U.S. dollar

 

 

1,077.18

 

 

 

5.4

 

 

 

0.1

 

Buy Kazakhstani tenge sell U.S. dollar

 

 

338.75

 

 

 

0.9

 

 

 

 

Buy Mexican peso sell Euro

 

 

22.97

 

 

 

7.1

 

 

 

(0.2

)

Buy Malaysian ringgit sell Euro

 

 

4.90

 

 

 

0.5

 

 

 

 

Buy Norwegian krone sell U.S. dollar

 

 

8.26

 

 

 

1.2

 

 

 

 

Buy Peruvian nuevo sol sell Euro

 

 

3.85

 

 

 

2.3

 

 

 

 

Buy Russian ruble sell Euro

 

 

70.47

 

 

 

4.4

 

 

 

0.1

 

Buy Swedish krona sell U.S. dollar

 

 

8.37

 

 

 

1.9

 

 

 

0.1

 

Buy Thai baht sell Euro

 

 

38.69

 

 

 

2.2

 

 

 

 

Buy Taiwan dollar sell U.S. dollar

 

 

29.78

 

 

 

5.9

 

 

 

0.1

 

Buy U.S. dollar sell Colombian peso

 

 

2,996.00

 

 

 

1.0

 

 

 

 

Buy U.S. dollar sell Euro

 

 

1.15

 

 

 

141.1

 

 

 

(5.3

)

Buy U.S. dollar sell British pound

 

 

1.34

 

 

 

6.8

 

 

 

(0.1

)

Buy U.S. dollar sell South African rand

 

 

13.93

 

 

 

1.9

 

 

 

(0.2

)

Buy South African rand sell Euro

 

 

15.18

 

 

 

0.9

 

 

 

 

Total forward contracts

 

 

 

 

 

$

435.4

 

 

$

(0.8

)

2019:

Foreign Currency

 

Average

Contract Rate

 

 

Original

Notional Amount

 

 

Fair Value

Gain (Loss)

 

 

 

 

 

 

 

(In millions)

 

 

(In millions)

 

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Buy Chinese yuan sell Euro

 

 

7.51

 

 

$

61.8

 

 

$

1.0

 

Buy Colombian peso sell U.S. dollar

 

 

3,111.41

 

 

 

2.6

 

 

 

0.1

 

Buy Euro sell Australian dollar

 

 

1.46

 

 

 

1.7

 

 

 

 

Buy Euro sell Chilean peso

 

 

723.80

 

 

 

1.0

 

 

 

 

Buy Euro sell Hong Kong dollar

 

 

8.11

 

 

 

13.4

 

 

 

0.1

 

Buy Euro sell Indonesian rupiah

 

 

14,394.40

 

 

 

9.4

 

 

 

(0.1

)

Buy Euro sell Japanese yen

 

 

122.54

 

 

 

0.6

 

 

 

 

Buy Euro sell Mexican peso

 

 

22.01

 

 

 

52.2

 

 

 

1.2

 

Buy Euro sell Peruvian nuevo sol

 

 

3.61

 

 

 

3.9

 

 

 

(0.1

)

Buy Euro sell Philippine peso

 

 

53.11

 

 

 

5.4

 

 

 

(0.1

)

Buy Euro sell Russian ruble

 

 

68.37

 

 

 

5.6

 

 

 

(0.3

)

Buy Euro sell U.S. dollar

 

 

1.08

 

 

 

74.5

 

 

 

(1.5

)

Buy Euro sell South African rand

 

 

15.02

 

 

 

3.4

 

 

 

(0.1

)

Buy British pound sell Euro

 

 

0.84

 

 

 

3.1

 

 

 

 

Buy Hong Kong dollar sell Euro

 

 

8.11

 

 

 

11.9

 

 

 

(0.1

)

Buy Indonesian rupiah sell Euro

 

 

14,222.02

 

 

 

3.9

 

 

 

 

Buy Korean won sell U.S. dollar

 

 

1,167.30

 

 

 

5.0

 

 

 

(0.2

)

Buy Kazakhstani tenge sell U.S. dollar

 

 

342.00

 

 

 

0.9

 

 

 

 

Buy Mexican peso sell Euro

 

 

21.30

 

 

 

11.9

 

 

 

(0.3

)

Buy Norwegian krone sell U.S. dollar

 

 

8.70

 

 

 

1.1

 

 

 

 

Buy Peruvian nuevo sol sell Euro

 

 

3.57

 

 

 

1.0

 

 

 

 

Buy Philippine peso sell Euro

 

 

52.42

 

 

 

1.7

 

 

 

 

Buy Russian ruble sell Euro

 

 

67.50

 

 

 

3.2

 

 

 

0.1

 

Buy Swedish krona sell U.S. dollar

 

 

9.17

 

 

 

0.8

 

 

 

 

Buy Taiwan dollar sell U.S. dollar

 

 

32.08

 

 

 

17.1

 

 

 

(0.1

)

Buy U.S. dollar sell Colombian peso

 

 

3,092.61

 

 

 

5.6

 

 

 

(0.1

)

Buy U.S. dollar sell Euro

 

 

1.06

 

 

 

140.4

 

 

 

4.5

 

Buy U.S. dollar sell Japanese yen

 

 

117.39

 

 

 

0.5

 

 

 

 

Buy U.S. dollar sell South African rand

 

 

14.14

 

 

 

2.1

 

 

 

(0.1

)

Buy South African rand sell Euro

 

 

14.75

 

 

 

0.4

 

 

 

 

Buy South African rand sell U.S. dollar

 

 

14.24

 

 

 

1.1

 

 

 

 

Total forward contracts

 

 

 

 

 

$

447.2

 

 

$

3.9

 

   
Weighted-
Average
Contract Rate
  
Notional
Amount
  
Fair Value Gain
(Loss)
   
(in millions, except weighted-average contract rate)
As of December 31, 2020
                 
Buy British pound sell Euro
    0.92    $3.4   $0.1 
Buy British pound sell U.S. dollar
    1.34     1.5    —   
Buy Chinese yuan sell Euro
    8.14     52.1    (0.1
Buy Chinese yuan sell U.S. dollar
    7.13     99.3    8.5 
Buy Colombian peso sell U.S. dollar
    3,422.09     1.1    —   
Buy Danish krone sell U.S. dollar
    6.10     1.0    —   
Buy Euro sell Australian dollar
    1.61     1.4    —   
Buy Euro sell British pound
    0.91     2.6    —   
Buy Euro sell Canadian dollar
    1.56     1.1    —   
Buy Euro sell Chilean peso
    896.37     2.6    (0.1
Buy Euro sell Hong Kong dollar
    9.49     4.4    —   
Buy Euro sell Indian rupee
    90.29     4.9    (0.1
Buy Euro sell Indonesian rupiah
    17,189.96     4.1    —   
Buy Euro sell Israeli shekel
    3.98     0.9    —   
Buy Euro sell Kazakhstani tenge
    520.25     3.1    —   
Buy Euro sell Malaysian ringgit
    4.98     1.2    —   
Buy Euro sell Mexican peso
    26.22     55.7    (3.4
Buy Euro sell Peruvian nuevo sol
    4.41     1.6    —   
Buy Euro sell Philippine peso
    59.13     1.2    —   
Buy Euro sell Russian ruble
    92.13     7.7    (0.1
Buy Euro sell South African rand
    18.00     5.4    —   
Buy Euro sell Taiwan dollar
    34.30     1.2    —   
Buy Euro sell Turkish lira   
 
9.32
    
2.9
    
(0.1
)
136

   
Weighted-
Average
Contract Rate
  
Notional
Amount
  
Fair Value Gain
(Loss)
   
(in millions, except weighted-average contract rate)
Buy Euro sell Vietnamese dong
    27,872.81     17.5     0.2 
Buy Indonesian rupiah sell U.S. dollar
    14,115.17     7.1     0.1 
Buy Kazakhstani tenge sell Euro
    517.65     2.4     —   
Buy Korean won sell U.S. dollar
    1,114.85     10.0     0.2 
Buy Mexican peso sell U.S. dollar
    19.97     35.1     —   
Buy Norwegian krone sell U.S. dollar
    8.66     2.2     —   
Buy Russian ruble sell Euro
    90.11     1.2     —   
Buy Swedish krona sell U.S. dollar
    8.25     2.7     —   
Buy Taiwan dollar sell U.S. dollar
    27.67     15.2     —   
Buy U.S. dollar sell Australian dollar
    0.76     2.0     —   
Buy U.S. dollar sell Chinese yuan
    6.75     47.1     (1.3
Buy U.S. dollar sell Colombian peso
    3,525.72     4.2     (0.1
Buy U.S. dollar sell Euro
    1.20     24.9     (0.4
Buy U.S. dollar sell Korean won
    1,107.10     16.3     (0.3
Buy U.S. dollar sell Mexican peso
    21.94     11.3     (0.6
Buy U.S. dollar sell Philippine peso
    48.51     8.2     (0.1
Buy U.S. dollar sell Thai baht
    31.08     3.2     (0.1
                   
Total forward contracts
         $471.0    $2.3 
                   
   
Weighted-
Average
Contract Rate
  
Notional
Amount
  
Fair Value Gain
(Loss)
   
(in millions, except weighted-average contract rate)
As of December 31, 2019
                  
Buy British pound sell Euro
    0.86    $3.3    $—   
Buy British pound sell U.S. dollar
    1.30     2.7     0.1 
Buy Chinese yuan sell Euro
    7.99     58.4     0.4 
Buy Chinese yuan sell U.S. dollar
    7.16     73.8     1.9 
Buy Colombian peso sell U.S. dollar
    3,323.67     1.7     —   
Buy Euro sell Australian dollar
    1.62     1.1     —   
Buy Euro sell British pound
    0.86     4.9     (0.1
Buy Euro sell Hong Kong dollar
    8.70     4.1     —   
Buy Euro sell Indonesian rupiah
    15,632.92     13.0     (0.1
Buy Euro sell Korean won
    1,297.40     1.7     —   
Buy Euro sell Malaysian ringgit
    4.62     2.9     —   
Buy Euro sell Mexican peso
    22.41     63.3     (1.8
Buy Euro sell Peruvian nuevo sol
    3.73     1.1     —   
Buy Euro sell Philippine peso
    56.66     12.0     0.1 
Buy Euro sell Russian ruble
    70.47     1.7     —   
Buy Euro sell South African rand
    15.95     2.7     —   
Buy Euro sell Taiwan dollar
    33.66     3.8     —   
Buy Euro sell Thai baht
    33.66     2.8     —   
Buy Euro sell U.S. dollar
    1.12     61.5     0.4 
Buy Euro sell Vietnamese dong
    26,052.72     31.7     (0.1
Buy Indonesian rupiah sell U.S. dollar
    14,080.00     7.2     0.1 
Buy Norwegian krone sell U.S. dollar
    8.96     1.1     —   
Buy Swedish krona sell U.S. dollar
    9.36     0.6     —   
Buy Taiwan dollar sell U.S. dollar
    29.89     4.1     —   
Buy U.S. dollar sell Colombian peso
    3,304.37     1.9     —   
Buy U.S. dollar sell Euro
    1.12     134.9     (0.4
Buy U.S. dollar sell Mexican peso
    22.54     3.7     (0.3
                   
Total forward contracts
         $501.7    $0.2 
                   
137

The following tables summarize the derivative activity during the years ended December 31, 2017, 2016,2020, 2019, and 20152018 relating to all the Company’s derivatives.

Gains and Losses on Derivative Instruments

Instrument

s
The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive loss during the years ended December 31, 2017, 2016,2020, 2019, and 2015:

2018:

 

 

Amount of Gain (Loss) Recognized

in Other Comprehensive Loss

For the Year Ended

 

 

 

December 31,

2017

 

 

December 31,

2016

 

 

December 31,

2015

 

 

 

(In millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory

    and intercompany management fee hedges

 

$

(7.9

)

 

$

8.1

 

 

$

14.8

 

   
Amount of Gain (Loss) Recognized in Other
Comprehensive Income (Loss)

Year Ended December 31,
   
    2020    
  
    2019    
  
    2018    
   
(in millions)
Derivatives designated as hedging instruments:
                  
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
   $2.3    $(1.9   $(3.6
Interest rate swaps
    (1.6    —       —   

As of December 31, 2017,2020, the estimated amount of existing net gainslosses related to cash flow hedges recorded in accumulated other comprehensive loss that are expected to be reclassified into earnings over the next twelve months was $0.3$3.9 million.

The effect of cash flow hedging relationships on the Company’s consolidated statements of income for the years ended December 31, 2020, 2019, and 2018 was as follows:
   
Location and Amount of Gain (Loss)
Recognized in Income on Cash Flow
Hedging Relationships
   
Year Ended December 31,
   
2020
   
Cost of
sales
  
Selling,
general, and
administrative

expenses
  
Interest
expense
   
(in millions)
Total amounts presented in the consolidated statements of income
   $1,150.6    $2,075.0    $133.0 
    
Foreign exchange currency contracts relating to inventory hedges:
                  
Amount of gain reclassified from accumulated other comprehensive loss to income
    5.1     —       —   
Amount of loss excluded from assessment of effectiveness recognized in income(1)
    (3.3)    —       —   
    
Foreign exchange currency contracts relating to intercompany management fee hedges:
                  
Amount of loss reclassified from accumulated other comprehensive loss to income
    —       (0.2)    —   
Amount of gain excluded from assessment of effectiveness recognized in income
    —       0.1     —   
    
Interest rate swaps:
                  
Amount of loss reclassified from accumulated other comprehensive loss to income
    —       —       (0.5)
Amount of gain excluded from assessment of effectiveness recognized in income
    —       —       —  
138

   
Location and Amount of (Loss) Gain

Recognized in Income on Cash Flow
Hedging Relationships
   
Year Ended December 31,
   
2019
   
Cost of
sales
  
Selling,
general, and

administrative

expenses
  
Interest
expense
   
(in millions)
Total amounts presented in the consolidated statements of income
   $958.0    $1,940.3    $153.0 
    
Foreign exchange currency contracts relating to inventory hedges:
                  
Amount of loss reclassified from accumulated other comprehensive loss to income
    (0.2)    —       —   
Amount of loss excluded from assessment of effectiveness recognized in income(1)
    (3.3)    —       —   
    
Foreign exchange currency contracts relating to intercompany management fee hedges:
                  
Amount of gain reclassified from accumulated other comprehensive loss to income
    —       1.0     —   
Amount of gain excluded from assessment of effectiveness recognized in income
    —       0.2     —   
    
Interest rate swaps:
                  
Amount of gain reclassified from accumulated other comprehensive loss to income
    —       —       —   
Amount of gain excluded from assessment of effectiveness recognized in income
    —       —       —   
   
Location and Amount of Gain (Loss)
Recognized in Income on Cash Flow
Hedging Relationships
   
Year Ended December 31,
   
2018
   
Cost of
sales
  
Selling,
general, and
administrative
expenses
  
Interest
expense
   
(in millions)
Total amounts presented in the consolidated statements of income
   $919.3    $1,955.2    $181.0 
    
Foreign exchange currency contracts relating to inventory hedges:
                  
Amount of gain reclassified from accumulated other comprehensive loss to income
    3.6     —       —   
Amount of loss excluded from assessment of effectiveness recognized in income(1)
    —       (2.9)    —   
    
Foreign exchange currency contracts relating to intercompany management fee hedges:
                  
Amount of loss reclassified from accumulated other comprehensive loss to income
    —       (3.8)    —   
Amount of gain excluded from assessment of effectiveness recognized in income
    —       0.8     —   
139

Location and Amount of Gain (Loss)
Recognized in Income on Cash Flow
Hedging Relationships
Year Ended December 31,
2018
Cost of
sales
Selling,
general, and
administrative
expenses
Interest
expense
(in millions)
Interest rate swaps:
Amount of gain reclassified from accumulated other comprehensive loss to income
—  —  —  
Amount of gain excluded from assessment of effectiveness recognized in incom
e
—  —  —  
(1)
As a result of adopting ASU 2017-12 during the first quarter of 2019, for the years ended December 31, 2020 and 2019, the Company recognized gains (losses) excluded from the assessment of effectiveness on foreign exchange currency contracts relating to inventory hedges in cost of sales within its consolidated statements of income. Prior to the adoption of ASU 2017-12, for the year ended December 31, 2018, the Company recognized gains (losses) excluded from the assessment of effectiveness on foreign exchange currency contracts relating to inventory hedges in selling, general, and administrative expenses within its consolidated statement of income.
The following table summarizes gains (losses) recorded to income relating to derivative instruments recorded to incomenot designated as hedging instruments during the years ended December 31, 2017, 2016,2020, 2019, and 2015:

2018:

 

 

Amount of Gain (Loss)

Recognized in Income

For the Year Ended

 

 

 

 

 

December 31,

2017

 

 

December 31,

2016

 

 

December 31,

2015

 

 

Location of Gain (Loss)

Recognized in Income

 

 

(In millions)

 

 

 

Derivatives designated as hedging

    instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to

    inventory hedges and intercompany

    management fee hedges(1)

 

$

(0.1

)

 

$

0.2

 

 

$

0.4

 

 

Selling, general and

administrative expenses

Derivatives not designated as hedging

    instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

(8.6

)

 

$

(4.3

)

 

$

(4.1

)

 

Selling, general and

administrative expenses

   
Amount of Gain (Loss)
Recognized in Income
    
   
Year Ended
December 31,
    
   
2020
   
2019
   
2018
   
Location of Gain (Loss) Recognized
in Income
   
(in millions)
    
Derivatives not designated as hedging instruments:
                  
Foreign exchange currency contracts
  $2.5   $1.0   $(4.0  Selling, general, and administrative expenses

(1)

For foreign exchange contracts designated as hedging instruments, the amounts recognized in income primarily represent the amounts excluded from the assessment of hedge effectiveness for the years ended December 31, 2017 and 2016. For the year ended December 31, 2015, there was a $1.3 million benefit related to hedge ineffectiveness partially offset against a $0.9 million expense related to amounts excluded from the assessment of hedge effectiveness recognized in income (loss).

The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the years ended December 31, 2017, 2016, and 2015:

 

 

Amount of Gain (Loss) Reclassified

from Accumulated Other

Comprehensive Loss into Income

 

 

Location of Gain

(Loss) Reclassified

 

 

For the Year Ended

 

 

from Accumulated Other

 

 

December 31,

2017

 

 

December 31,

2016

 

 

December 31,

2015

 

 

Comprehensive Loss into

Income (effective portion)

 

 

(In millions)

 

 

 

Derivatives designated as hedging

    instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to

    inventory hedges

 

$

(0.5

)

 

$

14.7

 

 

$

15.8

 

 

Cost of sales

Foreign exchange currency contracts relating to

    intercompany management fee hedges

 

$

(2.2

)

 

$

0.3

 

 

$

0.2

 

 

Selling, general

and administrative

expenses

The Company reports its derivatives at fair value as either assets or liabilities within its consolidated balance sheets. See Note 13,

Fair Value Measurements
, for information on derivative fair values and their consolidated balance sheets locationsheet locations as of December 31, 20172020 and 2016.

2019.

12. Income Taxes

The components of income before income taxes arewere as follows (in millions):

follows:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Domestic

 

$

(29.0

)

 

$

(89.3

)

 

$

80.9

 

Foreign

 

 

500.2

 

 

 

454.0

 

 

 

405.5

 

Total

 

$

471.2

 

 

$

364.7

 

 

$

486.4

 

   
Year Ended December 31,
 
   
2020
   
2019
   
2018
 
   
(in millions)
 
Domestic
  $152.5   $48.6   $(2.0
Foreign
   363.9    402.8    466.2 
                
Total
  $516.4   $451.4   $464.2 
                
140

Income taxes arewere as follows (in millions):

follows:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

$

147.1

 

 

$

127.9

 

 

$

147.0

 

Federal

 

 

10.6

 

 

 

12.4

 

 

 

35.4

 

State

 

 

1.8

 

 

 

0.8

 

 

 

3.1

 

 

 

 

159.5

 

 

 

141.1

 

 

 

185.5

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

(8.6

)

 

 

12.5

 

 

 

(13.2

)

Federal

 

 

106.4

 

 

 

(47.2

)

 

 

(23.8

)

State

 

 

 

 

 

(1.7

)

 

 

(1.2

)

 

 

 

97.8

 

 

 

(36.4

)

 

 

(38.2

)

 

 

$

257.3

 

 

$

104.7

 

 

$

147.3

 

   
Year Ended December 31,
 
   
2020
   
2019
   
2018
 
   
(in millions)
 
Current
               
Foreign
  $122.0   $100.6   $150.7 
Federal
   13.7    22.1    24.9 
State
   6.1    2.3    0.1 
                
    141.8    125.0    175.7 
                
Deferred:
               
Foreign
   (2.7   12.8    (13.7
Federal
   3.9    1.3    8.0 
State
   0.8    1.3    (2.4
                
    2.0    15.4    (8.1
                
   $143.8   $140.4   $167.6 
                
The significant categories of temporary differences that gave rise to deferred tax assets and liabilities arewere as follows (tax effected in millions):

follows:

 

 

December 31,

 

 

 

2017

 

 

2016

 

Deferred income tax assets:

 

 

 

 

 

 

 

 

Accruals not currently deductible

 

$

78.5

 

 

$

85.2

 

Tax loss and credit carryforwards of certain foreign

    subsidiaries

 

 

137.6

 

 

 

115.1

 

Tax loss and domestic tax credit carryforwards

 

 

191.4

 

 

 

102.6

 

Deferred compensation plan

 

 

49.7

 

 

 

73.8

 

Accrued vacation

 

 

4.4

 

 

 

6.2

 

Inventory reserve

 

 

7.4

 

 

 

11.2

 

Other

 

 

4.9

 

 

 

2.5

 

Gross deferred income tax assets

 

 

473.9

 

 

 

396.6

 

Less: valuation allowance

 

 

(299.4

)

 

 

(115.4

)

Total deferred income tax assets

 

$

174.5

 

 

$

281.2

 

Deferred income tax liabilities:

 

 

 

 

 

 

 

 

Intangible assets

 

$

71.1

 

 

$

112.2

 

Depreciation/amortization

 

 

5.4

 

 

 

15.9

 

Unremitted foreign earnings

 

 

20.5

 

 

 

5.5

 

Other

 

 

7.7

 

 

 

7.7

 

Total deferred income tax liabilities

 

 

104.7

 

 

 

141.3

 

Total net deferred tax assets

 

$

69.8

 

 

$

139.9

 

   
December 31,
 
   
2020
   
2019
 
   
(in millions)
 
Deferred income tax assets:
          
Accruals not currently deductible
  $92.6   $80.2 
Tax loss and credit carryforwards of certain foreign subsidiaries
   128.3    103.6 
Tax loss and domestic tax credit carryforwards
   208.7    215.2 
Deferred compensation plan
   39.6    40.9 
Deferred interest expense
   67.4    35.5 
Accrued vacation
   5.9    5.5 
Inventory reserve
   5.5    4.7 
Operating lease liabilities
   36.6    21.5 
Other
   6.6    6.0 
           
Gross deferred income tax assets
   591.2    513.1 
Less: valuation allowance
   (390.8   (330.3
           
Total deferred income tax assets
  $200.4   $182.8 
           
Deferred income tax liabilities:
          
Intangible assets
  $71.2   $71.1 
Depreciation/amortization
   2.7    3.7 
Unremitted foreign earnings
   14.9    22.7 
Operating lease assets
   32.9    18.0 
Other
   22.0    9.4 
           
Total deferred income tax liabilities
   143.7    124.9 
           
Total net deferred tax assets
  $56.7   $57.9 
           

Tax loss and credit carryforwards of certain foreign subsidiaries for 20172020 and 20162019 were $137.6 $128.3
million and $115.1$103.6 million, respectively. If unused, tax loss and credit carryforwards of certain foreign subsidiaries of $70.7
$102.7 million will expire between 20182021 and 20272037 and $66.9$25.6 million can be carried forward indefinitely. U.S. 
141

foreign tax credit carryforwards for 20172020 and 20162019 were $186.2$202.1 million and $99.6$208.9 million, respectively.respectively, which are included in Tax loss and domestic tax credit carryforwards in the table above. If unused, U.S. foreign tax credit carryforwards begin towill expire in 2020. The domesticbetween 2023 and 2030. Domestic research and development tax credit carryforwardcarryforwards for 2017 was $4.8 million.2020 and 2019 were $9.0 million and $8.4 
million, respectively
. If unused, domestic research and development tax credit carryforwards will expirebegin expiring in 2037.2036. The statedeferred interest expense can be carried forward indefinitely. State tax loss carryforwards for 2017 2020
were $0.4fully utilized and for
 2019 were $0.9 million. If unused, state tax loss carryforwards will expire between 2022 and 2037.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017, or the Act. The Act, which is also commonly referred to as “U.S. Tax Reform,” significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a modified territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. As a resultDuring the fourth quarter of 2017, in accordance with the SEC Staff Accounting Bulletin (“SAB”) No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”), the Company recorded a provisional net expense of $153.3 million during the fourth quarter of 2017.$153.3 million. This amount, which is included in tax expense, predominantly consists of three components: (i) a $163.4$163.4 million charge caused by the establishment of a valuation allowance on deferred tax assets due to the Act’s changes in the sourcing and calculation of foreign income, which thereby limited the expected utilization of foreign tax credit carryforwards, (ii) a $5.5$5.5 million benefit resulting from the remeasurement of the Company’s net deferred tax liabilities in the U.S. based on the new lower corporate income tax rate, and (iii) a non-recurring benefit of $4.6$4.6 million related to additional foreign tax credits (a result of the impact of a one-time mandatory repatriation on previously unremitted earnings of certain non-U.S. subsidiaries that are owned either directly or indirectly by the U.S. parent).

For U.S. foreign tax credit purposes, the Company incurred overall domestic losses in 2017 and 2016 which limited the Company’s ability to claim foreign tax credits. In future taxable years as domestic source income is generated, no less than 50% of such income will be reclassified as foreign source income as allowed and will increase the Company’s foreign tax credit limitation, thereby enabling the use of additional foreign tax credits. The Company believes it is more likely than not that $31.4 million of foreign tax credits, resulting from the overall domestic loss, will be utilized based on the Company’s current interpretation of the Act. As described below, the Company continues to analyze the Act and related information, and accordingly the Company may record additional provisional amounts or adjustments in future periods.

Although the $153.3$153.3 million provisional net expense representsrepresented what the Company believes isbelieved was a reasonable estimate of the impact of the income tax effects of the Act on the Company’s Consolidated Financial Statementsconsolidated financial statements as of December 31, 2017, it should bewas considered provisional. Provisional items include, but are not limited to, foreign tax credits and associated valuation allowance, limitations on executive compensation, and the one-time tax on previously unremitted foreign earnings of U.S. subsidiaries. Additionally, theThe Company continuescontinued to analyze other information and regulatory guidance, and accordingly the Company may record additional provisional amounts or adjustmentsincluding proposed regulations relating to provisional amounts in future periods. Any adjustments to these provisional amounts will be reported as a component offoreign tax expense in the reporting period in which any such adjustments are determined, which will be no later thancredits that were issued during the fourth quarter of 2018, and other information, including a continued inability to fully utilize foreign tax credits generated. Accordingly, the Company recorded an additional $29.5 million of expense during the fourth quarter of 2018, which was caused by the establishment of a valuation allowance on deferred tax assets relating to foreign tax credit carryforwards. As a result, the Company’s accounting for the ultimate tax effects of the Act was finalized under SAB 118 as of December 31, 2018.

The Company recognizes valuation allowances on deferred tax assets reported if, based on the weight of the evidence it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 20172020 and 20162019, the Company held valuation allowances against net deferred tax assets of certain subsidiaries, primarily related to tax loss carryforwards and U.S. foreign tax credits, in the amount of $299.4$390.8 million and tax loss carryforwards of $115.4$330.3 million, respectively. The change in the Company’s valuation allowance during 20172020 of $184.0$60.5 million was relatedprimarily attributable to $183.7foreign deferred interest expense and tax loss carryforwards. The change in the Company’s valuation allowance during 2019 of $11.2 million was primarily attributable to foreign deferred interest expense and tax loss carryforwards. The change in the Company’s valuation allowance during 2018 of net additions charged to income tax expense,$52.5 million was primarily related to the valuation allowance established for U.S. foreign tax credits described above, and $0.3 million of currency translation adjustments recognized within other comprehensive income. The change in the Company’s valuation allowance during 2016 of $5.9 million was related to $5.6 million of net reductions charged to income tax expense and $0.3 million of currency translation adjustments recognized within other comprehensive income. The change in the Company’s valuation allowance during 2015 of $208.7 million was related to $205.6 million of net reductions charged to income tax expense, primarily related to the utilization of our deferred tax asset balance related to intercompany deferred interest expense, partially offset by increases in Venezuelan tax loss carryforwards, and $3.1 million of currency translation adjustments recognized within other comprehensive income.

above.

As of December 31, 2017,2020, the Company’s U.S. consolidated group had approximately $97.9 $147.7
million of unremitted earnings that were permanently reinvested relating to certain foreign subsidiaries. In addition, asAs of December 31, 2017,2020, Herbalife Nutrition Ltd. had approximately $2.4 $2.6
billion of permanently reinvested unremitted earnings relating to its operating subsidiaries. As a result of the Company’s decision to invest in the China Growth and
Impact Investment Program, approximately $
113.9
 million of unremitted earnings were permanently reinvested as of December 
31
,
2020
. Since Herbalife Nutrition Ltd.’s unremitted earnings have been permanently reinvested, deferred taxes were not provided on these unremitted earnings. Further, it is not practicable to
142
determine the amount of unrecognized deferred taxes with respect to these unremitted earnings. If the Company were to remit these unremitted earnings then it would be subject to income tax on these remittances. Deferred taxes have been accrued for earnings that are not considered indefinitely reinvested. The deferred tax on the unremitted foreign earnings as of December 31, 20172020 and 20162019 was a deferred tax liability of $29.1$22.3 million (net of valuation allowance) and $5.5$28.2 million, respectively.

The applicable statutory income tax rate in the Cayman Islands was zero for Herbalife Nutrition Ltd. for the years being reported. For purposes of the reconciliation between the provision for income taxes at the statutory rate and the provision for income taxes at the effective tax rate, a notional 35%21% tax rate is applied for the years ended December 31, 2020, 2019, and 2018 as follows:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Tax expense at United States statutory rate

 

$

164.9

 

 

$

127.7

 

 

$

170.2

 

Increase (decrease) in tax resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

Differences between U.S. and foreign tax rates on foreign

    income, including withholding taxes

 

 

(42.7

)

 

 

(16.6

)

 

 

203.1

 

U.S. tax (benefit) on foreign income net of foreign tax

    credits

 

 

(22.9

)

 

 

(10.2

)

 

 

(23.9

)

(Decrease) increase in valuation allowances

 

 

183.7

 

 

 

(5.6

)

 

 

(205.6

)

State taxes, net of federal benefit

 

 

1.9

 

 

 

0.3

 

 

 

1.7

 

Unrecognized tax benefits

 

 

(4.0

)

 

 

5.3

 

 

 

10.1

 

Excess tax benefits on equity awards

 

 

(31.1

)

 

 

 

 

 

 

Other

 

 

7.5

 

 

 

3.8

 

 

 

(8.3

)

Total

 

$

257.3

 

 

$

104.7

 

 

$

147.3

 

   
Year Ended December 31,
 
   
2020
   
2019
   
2018
 
   
(in millions)
 
Tax expense at United States statutory rate
  $108.4   $94.8   $97.4 
Increase (decrease) in tax resulting from:
               
Differences between U.S. and foreign tax rates on foreign income, including withholding taxes
   (11.2   40.9    62.0 
U.S. tax (benefit) on foreign income, net of foreign tax credits
   (20.5   (10.1   (0.8
Increase in valuation allowances
   60.6    11.4    52.7 
State taxes, net of federal benefit
   5.2    3.1    (1.5
Unrecognized tax benefits
   3.9    (6.9   6.9 
Unremitted earnings
   (8.3   10.0    (9.2
Excess tax benefits on equity awards
   (3.1   (5.8   (53.1
Other
   8.8    3.0    13.2 
                
Total
  $143.8   $140.4   $167.6 
                
As of December 31, 2017,2020, the total amount of unrecognized tax benefits, including related interest and penalties was $62.0$65.9 million. If the total amount of unrecognized tax benefits was recognized, $44.4$46.9 million of unrecognized tax benefits, $9.9$11.4 million of interest, and $1.5$1.8 million of penalties would impact the effective tax rate. As of December 31, 2016,2019, the total amount of unrecognized tax benefits, including related interest and penalties was $62.0$59.9 million. If the total amount of unrecognized tax benefits was recognized, $44.8$40.3 million of unrecognized tax benefits, $9.4$9.1 million of interest, and $2.1$1.9 million of penalties would impact the effective tax rate.

The Company accounts for the interest and penalties generated by tax contingencies as a component of income tax expense. During the year ended December 31, 2017,2020, the Company recorded an increase in interest expense related to uncertain tax positions of $2.4 million and a decrease in interest and penalty expense related to uncertain tax positions of less than $0.1 million and $0.8 million, respectively.
.
During the year ended December 31, 2016,2019, the Company recorded a decrease in interest expense related to uncertain tax positions of $0.7 million and an increase in penalty expense related to uncertain tax positions
 of
$0.2 
million
. During the year ended December 31, 2018, the Company recorded an increase in interest and penalty expense related to uncertain tax positions of $2.7$1.0 million and $0.7 million, respectively. During the year ended December 31, 2015, the Company recorded an increase in interest and penalty expense related to uncertain tax positions of $2.0 million and $0.6$0.4 million, respectively. As of December 31, 2017,2020, the total amount of interest and penalties related to unrecognized tax benefits recognized in the statement of financial position were $9.9consolidated balance sheet was $11.4 million and $1.5 million, $1.8 millio
n,
respectively. As of December 31, 2016,2019, the total amount of interest and penalties related to unrecognized tax benefits recognized in the statement of financial position were $9.4consolidated balance sheet was $9.1 million and $2.1 $1.9 
million, respectively. As of December 31, 2015,2018, the total amount of interest and penalties related to unrecognized tax benefits recognized in the statement of financial position were $7.1consolidated balance sheet was $10.0 million and $1.5$1.7 million, respectively.


143

The following changes occurred in the amount of unrecognized tax benefits during the years ended December 31, 2017, 2016,2020, 2019, and 2015 (in millions):

2018:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Beginning balance of unrecognized tax benefits

 

$

50.5

 

 

$

49.4

 

 

$

40.5

 

Additions for current year tax positions

 

 

13.0

 

 

 

9.3

 

 

 

11.3

 

Additions for prior year tax positions

 

 

3.6

 

 

 

2.0

 

 

 

2.5

 

Reductions for prior year tax positions

 

 

(6.0

)

 

 

(4.7

)

 

 

(0.6

)

Reductions for audit settlements

 

 

(7.1

)

 

 

 

 

 

(0.1

)

Reductions for the expiration of statutes of limitation

 

 

(6.2

)

 

 

(4.2

)

 

 

(2.8

)

Changes due to foreign currency translation adjustments

 

 

2.8

 

 

 

(1.3

)

 

 

(1.4

)

Ending balance of unrecognized tax benefits (excluding

    interest and penalties)

 

 

50.6

 

 

 

50.5

 

 

 

49.4

 

Interest and penalties associated with unrecognized tax

    benefits

 

 

11.4

 

 

 

11.5

 

 

 

8.6

 

Ending balance of unrecognized tax benefits (including

    interest and penalties)

 

$

62.0

 

 

$

62.0

 

 

$

58.0

 

   
Year Ended December 31,
 
   
2020
   
2019
   
2018
 
   
(in millions)
 
Beginning balance of unrecognized tax benefits
  $48.9   $53.5   $50.6 
Additions for current year tax positions
   9.7    8.4    12.8 
Additions for prior year tax positions
   1.3    6.1    0.7 
Reductions for prior year tax positions
   (0.6   (15.4   (2.1
Reductions for audit settlements
   (4.7   (0.1   (0.5
Reductions for the expiration of statutes of limitations
   (2.1   (3.6   (4.8
Changes due to foreign currency translation adjustments
   0.2    —      (3.2
                
Ending balance of unrecognized tax benefits (excluding interest and penalties)
   52.7    48.9    53.5 
Interest and penalties associated with unrecognized tax benefits
   13.2    11.0    11.7 
                
Ending balance of unrecognized tax benefits (including interest and penalties)
  $65.9   $59.9   $65.2 
                
The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimates in the period the audits are resolved, which may impact the Company’s effective tax rate. As of December 31, 2017,2020, the Company’s tax filings are generally subject to examination in major tax jurisdictions for years ending on or after December 31, 2012.

2015.

The Company believes that it is reasonably possible that the amount of unrecognized tax benefits could decrease by up to approximately $7.0$10.6 million within the next twelve months. Of this possible decrease, $0.7
$5.7 million 
would be due to the settlement of audits or resolution of administrative or judicial proceedings. The remaining possible decrease of $6.3 $4.9
million would be due to the expiration of statute of limitations in various jurisdictions.

13. Fair Value Measurements

The Company applies the provisions of FASB ASC Topic 820,
Fair Value Measurements and Disclosures
, or ASC 820, for its financial and non-financial assets and liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC
820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 inputs are unobservable inputs for the asset or liability.


144

Table of Contents
The Company measures certain assets and liabilities at fair value as discussed throughout the notes to its consolidated financial statements. Foreign exchange currency contracts and interest rate swaps are valued using standard calculations and modelsmodels. Foreign exchange currency contracts are valued primarily based on inputs such as observable forward rates, spot rates, and foreign currency exchange rates at the reporting period ended date. Interest rate swaps are valued primarily based on inputs such as LIBOR and swap yield curves at the reporting period ended date.
The Company’s derivative assets and liabilities are measured at fair value and consisted of Level 2 inputs and their amounts are shown below at their gross values as of December 31, 20172020 and December 31, 2016:

Fair Value Measurements at Reporting Date Using

2019:

 

 

Derivative Balance Sheet Location

 

Significant

Other

Observable

Inputs

(Level 2)

Fair Value at

December 31,

2017

 

 

Significant

Other

Observable

Inputs

(Level 2)

Fair Value at

December 31,

2016

 

 

 

 

 

(In millions)

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging

    instruments:

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

    relating to inventory and

    intercompany management fee

    hedges

 

Prepaid expenses and other current assets

 

$

2.9

 

 

$

4.6

 

Derivatives not designated as hedging

    instruments:

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

Prepaid expenses and other current assets

 

 

2.9

 

 

 

2.8

 

 

 

 

 

$

5.8

 

 

$

7.4

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging

    instruments:

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

    relating to inventory and

    intercompany management fee

    hedges

 

Other current liabilities

 

$

4.0

 

 

$

 

Derivatives not designated as hedging

    instruments:

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

Other current liabilities

 

 

2.6

 

 

 

3.5

 

 

 

 

 

$

6.6

 

 

$

3.5

 

   
Significant Other
Observable
Inputs (Level 2)
Fair Value as of
December 31,

2020
  
Significant Other
Observable
Inputs (Level 2)
Fair Value as of
December 31,

2019
  
Balance Sheet Location
   
(in millions)
   
ASSETS:
               
Derivatives designated as hedging instruments:
               
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
   $—      $0.1   Prepaid expenses and other current assets
Derivatives not designated as hedging instruments:
               
Foreign exchange currency contracts
    9.4     3.1   Prepaid expenses and other current assets
                
    $9.4    $3.2    
                
LIABILITIES:
               
Derivatives designated as hedging instruments:
               
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
   $3.9    $1.9   Other current liabilities
Interest rate swaps
    1.0     —     Other current liabilities
Derivatives not designated as hedging instruments:
               
Foreign exchange currency contracts
    3.2     1.1   Other current liabilities
                
    $8.1    $3.0    
                
The Company’s deferred compensation plan assets consist of Company ownedCompany-owned life insurance policies. As these policies are recorded at their cash surrender value, they are not required to be included in the fair value table above. See Note 6,
Employee Compensation Plans
, for a further description of its deferred compensation plan assets. The Company’s CVR liability is measured at fair value and would be categorized within Level 3
145

Table of the fair value hierarchy under ASC 820. See Note 8, Shareholders’ (Deficit) Equity, for a further description of the CVR liability.

Contents

The following tables summarize the offsetting of the fair values of the Company’s derivative assets and derivative liabilities for presentation in the Company’s consolidated balance sheets as of December 31, 20172020 and December 31, 2016:

2019:

 

 

Offsetting of Derivative Assets

 

 

 

Gross

Amounts of

Recognized

Assets

 

 

Gross

Amounts

Offset in the

Balance Sheet

 

 

Net Amounts

of Assets

Presented in

the Balance

Sheet

 

 

 

(In millions)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

5.8

 

 

$

(4.3

)

 

$

1.5

 

Total

 

$

5.8

 

 

$

(4.3

)

 

$

1.5

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

7.4

 

 

$

(3.0

)

 

$

4.4

 

Total

 

$

7.4

 

 

$

(3.0

)

 

$

4.4

 

 

 

Offsetting of Derivative Liabilities

 

 

 

Gross

Amounts of

Recognized

Liabilities

 

 

Gross

Amounts

Offset in the

Balance Sheet

 

 

Net Amounts

of Liabilities

Presented in

the Balance

Sheet

 

 

 

(In millions)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

6.6

 

 

$

(4.3

)

 

$

2.3

 

Total

 

$

6.6

 

 

$

(4.3

)

 

$

2.3

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

3.5

 

 

$

(3.0

)

 

$

0.5

 

Total

 

$

3.5

 

 

$

(3.0

)

 

$

0.5

 

   
Offsetting of Derivative Assets
   
Gross Amounts
of Recognized
Assets
  
Gross Amounts
Offset in the
Balance Sheet
  
Net Amounts of
Assets Presented
in the Balance
Sheet
   
(in millions)
December 31, 2020
                  
Foreign exchange currency contracts
   $9.4    $(1.8   $7.6 
                   
Total
   $9.4    $(1.8   $7.6 
                   
December 31, 2019
                  
Foreign exchange currency contracts
   $3.2    $(1.4   $1.8 
                   
Total
   $3.2    $(1.4   $1.8 
                   
   
Offsetting of Derivative Liabilities
   
Gross Amounts
of Recognized
Liabilities
  
Gross Amounts
Offset in the
Balance Sheet
  
Net Amounts of
Liabilities
Presented in the
Balance Sheet
   
(in millions)
December 31, 2020
                  
Foreign exchange currency contracts
   $7.1    $(1.8   $5.3 
Interest rate swaps
    1.0     —       1.0 
                   
Total
   $8.1    $(1.8   $6.3 
                   
December 31, 2019
                  
Foreign exchange currency contracts
   $3.0    $(1.4   $1.6 
                   
Total
   $3.0    $(1.4   $1.6 
                   
The Company offsets all of its derivative assets and derivative liabilities in its consolidated balance sheets to the extent it maintains master netting arrangements with related financial institutions. As of December 31, 20172020 and December 31, 2016,2019, all of the Company’s derivatives were subject to master netting arrangements and no collateralization was required for the Company’s derivative assets and derivative liabilities.

14. Detail of Certain Balance Sheet Accounts

Other Assets

The Other assets on the Company’s accompanying consolidated balance sheets includesincluded deferred compensation plan assets of $33.6$43.8 million and $30.6$38.9 million and deferred tax assets of $77.5 $96.0
million and $155.2$79.3 million as of December 31, 20172020 and 2016,2019, respectively.


146

Table of Contents
Other Current Liabilities

Other current liabilities consistconsisted of the following:

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

Accrued compensation

 

$

117.3

 

 

$

125.8

 

Accrued service fees to China independent

    service providers

 

 

58.7

 

 

 

46.3

 

Accrued advertising, events, and promotion

    expenses

 

 

46.3

 

 

 

48.4

 

Advance sales deposits

 

 

65.2

 

 

 

50.1

 

Income taxes payable

 

 

25.7

 

 

 

42.0

 

Other accrued liabilities

 

 

145.7

 

 

 

142.2

 

Total

 

$

458.9

 

 

$

454.8

 

   
December 31,
 
   
2020
   
2019
 
   
(in millions)
 
Accrued compensation
  $163.8   $121.6 
Accrued service fees to China independent service providers
   63.3    62.2 
Accrued advertising, events, and promotion expenses
   67.6    48.5 
Current operating lease liabilities
   35.5    37.4 
Advance sales deposits
   68.5    64.3 
Income taxes payable
   23.0    17.0 
Other accrued liabilities
   235.8    213.6 
           
Total
  $657.5   $564.6 
           
Other Non-Current Liabilities

The Other non-current liabilities on the Company’s accompanying consolidated balance sheets includesincluded deferred compensation plan liabilities of $58.1$72.3 million and $50.0$62.4 million and deferred income tax liabilities of $7.8 $39.3
million and $15.3$21.4 million as of December 31, 20172020 and 2016,2019, respectively. See Note 6,
Employee Compensation Plans
, to the consolidated financial statements for a further description of the Company’s deferred compensation plan assets and liabilities.

15. Subsequent Events

During

On January 2018,3, 2021, the Company entered into a stock purchase agreement with Mr. Carl C. Icahn and certain of his affiliates (collectively, the “Icahn Parties”) pursuant to which the Company agreed to purchase from certain of the Icahn Parties an indirect wholly owned subsidiaryaggregate of 12,486,993 common shares of the Company repurchased 4,200at a price per share of $48.05, the closing price of a share on the New York Stock Exchange on December 31, 2020, the last trading day prior to the execution of the purchase agreement, or an aggregate purchase price of approximately $600 million. The Company funded the transaction from cash on hand and approximately $150 million in borrowings under its revolving credit facility. The transaction closed on January 7, 2021.
On February 9, 2021, the Company’s board of directors authorized a new three-year $1.5 billion share repurchase program that will expire on February 9, 2024, which replaced the Company’s prior share repurchase authorization that was set to expire on October 30, 2023. This share repurchase program allows the Company, which includes an indirect wholly-owned subsidiary of Herbalife Nutrition Ltd., to repurchase the Company’s common shares at such times and prices as determined by management, as market conditions warrant, and to the extent Herbalife Nutrition Ltd.’s distributable reserves are available under Cayman Islands law. The 2018 Credit Facility permits the Company to repurchase its common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met. 
On February 10, 2021, the
Company amended the 2018 Credit Facility which, among other things, reduced the interest rate for aggregate consideration of approximately $0.3 million through open market purchasesborrowings under the Company’s $1.5 billion share repurchase program. These repurchases were effected pursuant2018 Term Loan B from either the eurocurrency rate plus a margin of 2.75% or the base rate plus a margin of 1.75% to Rule 10b5-1 trading plans. Seeeither the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. The maturity date remains unchanged and the outstanding borrowings under the 2018 Term Loan B still remain due in accordance with the provisions of the 2018 Credit Facility as described further in Note 8, Shareholders’ (Deficit) Equity, for a discussion5,
Long Term Debt. 
147


16. Quarterly Information (Unaudited)

 

 

2017

 

 

2016

 

 

 

(In millions, except per share data)

 

First Quarter Ended March 31

 

 

 

 

 

 

 

 

Net sales

 

$

1,102.1

 

 

$

1,119.6

 

Gross profit

 

 

897.5

 

 

 

906.5

 

Net income

 

 

85.2

 

 

 

95.8

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

1.03

 

 

$

1.16

 

Diluted

 

$

0.98

 

 

$

1.12

 

Second Quarter Ended June 30

 

 

 

 

 

 

 

 

Net sales

 

$

1,146.9

 

 

$

1,201.8

 

Gross profit

 

 

928.1

 

 

 

965.5

 

Net income (loss)

 

 

137.6

 

 

 

(22.9

)

Earnings (loss) per share

 

 

 

 

 

 

 

 

Basic

 

$

1.69

 

 

$

(0.28

)

Diluted

 

$

1.61

 

 

$

(0.28

)

Third Quarter Ended September 30

 

 

 

 

 

 

 

 

Net sales

 

$

1,085.4

 

 

$

1,122.0

 

Gross profit

 

 

870.0

 

 

 

912.9

 

Net income

 

 

54.5

 

 

 

87.7

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.69

 

 

$

1.06

 

Diluted

 

$

0.66

 

 

$

1.01

 

Fourth Quarter Ended December 31(1)

 

 

 

 

 

 

 

 

Net sales

 

$

1,093.3

 

 

$

1,045.0

 

Gross profit

 

 

883.5

 

 

 

848.9

 

Net (loss) income

 

 

(63.4

)

 

 

99.4

 

(Loss) Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

(0.87

)

 

$

1.19

 

Diluted

 

$

(0.87

)

 

$

1.16

 

   
2020
   
2019
 
   
(in millions, except
per share amounts)
 
First Quarter Ended March 31
          
Net sales
  $1,262.4   $1,172.2 
Gross profit
   1,016.7    930.6 
Net income
   45.6    96.3 
Earnings per share:
          
Basic
  $0.33   $0.70 
Diluted
  $0.32   $0.66 
Second Quarter Ended June 30
          
Net sales
  $1,346.9   $1,240.1 
Gross profit
   1,074.1    996.9 
Net income
   115.1    76.5 
Earnings per share:
          
Basic
  $0.84   $0.56 
Diluted
  $0.82   $0.54 
Third Quarter Ended September 30
    
Net sales
  $1,521.8   $1,244.5 
Gross profit
   1,199.1    1,001.1 
Net income
   138.1    81.5 
Earnings per share:
    
Basic
  $1.07   $0.59 
Diluted
  $1.04   $0.58 
Fourth Quarter Ended December 31(1)
    
Net sales
  $1,410.7   $1,220.3 
Gross profit
   1,101.3    990.5 
Net income
   73.8    56.7 
Earnings per share:
    
Basic
  $0.61   $0.41 
Diluted
  $0.59   $0.40 

(1)

Includes the impact of the U.S. Tax Reform enacted during the

The fourth quarter of 2017,2019 includes a net favorable adjustment to our unrecognized tax benefit liability of $11.4 million primarily attributable to transfer pricing matters in various foreign jurisdictions, and a legal accrual of $40 million relating to the SEC and DOJ investigations relating to the FCPA matter in China as described further in Note 12, Income Taxes7,
Contingencies
.


Item 16.

FORM

Form 10-K SUMMARY

Summary

None.


148

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HERBALIFE LTD.

HERBALIFE NUTRITION LTD.

By:

/s/ JOHN G. DESIMONE

By:

John G. DeSimone

/s/ ALEXANDER AMEZQUITA
Alexander Amezquita
Chief Financial Officer

Dated: February 22, 2018

17, 2021

149

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the datedates indicated.

Signature

Title

Date

Signature

Title

Date

/s/ RICHARD P. GOUDIS

DR. JOHN O. AGWUNOBI

Chairman of the Board and Chief
February 17, 2021
Dr. John O. Agwunobi
Executive Officer

(Principal Executive Officer)

Officer and Director)

February 22, 2018

Richard P. Goudis

/s/ JOHN G. DESIMONE

ALEXANDER AMEZQUITA

Chief Financial Officer

February 17, 2021
Alexander Amezquita
(Principal Financial Officer)

February 22, 2018

John G. DeSimone

/s/ BOSCO CHIU

JEHANGIR IRANI

Senior Vice President, and Principal

February 17, 2021
Jehangir “Bobby” Irani
Accounting Officer

(Principal Accounting Officer)

February 22, 2018

Bosco Chiu

/s/ RICHARD P. BERMINGHAM

Director

February 22, 2018

Richard P. Bermingham

/s/ PEDRO CARDOSO

Director

February 22, 2018

Pedro Cardoso

/s/ RICHARD H. CARMONA

Director

February 22, 2018

17, 2021

Richard H. Carmona

/s/ JONATHAN CHRISTODORO

ALAN LEFEVRE

Director

February 22, 2018

17, 2021

Jonathan Christodoro

Alan LeFevre

/s/ KEITH COZZA

JUAN MIGUEL MENDOZA

Director

February 22, 2018

17, 2021

Keith Cozza

Juan Miguel Mendoza

/s/ JEFFREY T. DUNN

Director

February 22, 2018

Jeffrey T. Dunn

/s/ HUNTER C. GARY

Director

February 22, 2018

Hunter C. Gary

/s/ MICHAEL O. JOHNSON

Director, Executive Chairman

February 22, 2018

Michael O. Johnson

/s/ JESSE A. LYNN

Director

February 22, 2018

Jesse A. Lynn

/s/ MICHAEL MONTELONGO

Director

February 22, 2018

17, 2021

Michael Montelongo

/s/ JAMES L. NELSON

Director

February 22, 2018

James L. Nelson

/s/ MARIA OTERO

Director

February 22, 2018

17, 2021

Maria Otero

/s/ MARGARITA PALÁU-HERNÁNDEZ
DirectorFebruary 17, 2021
Margarita Paláu-Hernández
/s/ JOHN TARTOL

Director

February 22, 2018

17, 2021

John Tartol

126

150